Stochastics - Technicals

Stochastics is a commonly used technical indicator that was developed by financial analyst George Lane in the 1950s. The indicator is designed to forecast stock prices and can be particularly effective when used to analyze the direction of channeling stocks, those which are selling in a defined trading range. Stochastics has the potential to forecast tops and bottoms, but has limited effectiveness when used to analyze stocks that are in a trend.

Lane theorized that prices often close near their previous highs in an uptrending market and close near their lows in a downtrending market. The signal to consider buying or selling comes when the stochastic oscillator crosses its moving average.

There are two lines present on a Stochastic chart: the 20 percent line and the 80 percent line. These are important points and can give an indication that something is about to occur which could be financially significant. When the lines climb above the 80 percent line, the stock is considered to be in an overbought position and might be ready to drop in price. Likewise, when the lines drop below the 20 percent line, the stock is considered to be oversold and might be ready to attract new buyers and increase in price.

Stochastics info by BetterTrades Charts