Stochastics

Celticheart Investor

A beginner's guide to trading and investing

Before I move on to other aspects of investing there are a couple more technical trading tools worth exploring.
Some of these are much more suited to the needs of the trader rather than the longer term investor but my view is, the more tools you have available to you the more you can tailor them to your needs, choosing to use any combination that suit both your needs and your investing / trading strategy.

So let's look at the "Stochastic Oscillator" which is fundamentally a technical momentum indicator that compares the closing shareprice to its range over a given period of time. The sensitivity in which this indicator compares movements in the market can be altered by adjusting the time frame or the moving average. In technical terms this oscillator is calculated using the following formula: %K = 100[(C - L14)/(H14 - L14)]

(%D = 3-period moving average of %K)  See: Moving Averages

Where C is the most recent closing sp / L14 being the lowest price paid of the previous 14 sessions and H14 being the highest price paid over the same period. Remember that this time period can be varied according to your needs.

For a more in-depth look at Stochastic oscillators see: Stochastic oscillators

Slow Stochastics will be found at the bottom of your chart. It is made up of two moving averages. The faster moving average is a blue line, the K line, while the slower moving average is the red line, the D line. These two moving averages will move between the 80 line and the 20 line. If the Stochastic is above 80, it said to be “overbought” and if it is below 20 it is said to be “oversold”.

The theory behind this indicator is that in an uptrend prices tend to close near their trading high and conversely close near their trading low during a down trend. Trading signals (buy/sell) occur when the %K crosses through a three day period moving average referred to as %D

The key with using the Stochastic indicator is, as with any indicator, only take signals in the direction of the current dominant trend i.e. if the trend is downward only take sell signals from Stochastics and if the trend is upwards only take buying signals from Stochastics.

Obviously this is a highly technical tool and should, as with all technical analysis  (TA) tools be ideally used in conjunction with other indicators for confirmation and as always without losing sight of the fundamentals of the company.

Next time:  Stop Losses

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.