Stochastic Oscillators. Road Maps For Trading Options & Stocks
If you are like 99% of people, you invest using that most reliable of indicators, your gut feeling. Occasionally you use the back-up method, your neighbor, who used THEIR gut feeling or heard a rumour about “something”, from “someone”. Not quite financial mathematics…
Your neighbor is probably not an economic analyst, and has no more idea than you do as to the direction a “sure thing” will take. Sure, if enough people have been primed to buy or sell there may be movement that someone will profit from, but chances are high that it will not be you…
Sometimes you consult the Human Crystal-Ball (your broker) who has a vested interest in churn churn, as their livelihood depends on brokerage and commissions…
If you ARE in the 99% and have yet to learn how the stock market works and is affected by various macro and micro events, your profit will probably be less than the broad market average over the mid to longer term. Of course, you may be lucky, but lightning rarely strikes twice in the same place…
There is a wealth of information on the internet about Technical Analysis and Fundamental Analysis. So much information that it is difficult to make sense of opposing views as to the viability or value of a particular option or stock…
I take the view that information is just that – Information. Some can be used, some cannot, and some is, well, interesting but not necessarily pertinent…
For the information to be pertinent, it must have relevance. In relation to stocks and options such relevance can be shown through historical and empirical evidence, when an indicator is validated by market activity, or value is determined by known factors such as price/earnings ratios or asset values.
An indicator that is widely used by Technical Analysts is Stochastic Oscillators. I use them in tandem with others but as a statistical tool, it has been successful all too often to be random…
Simplistically, in a bull market prices tend to close at or near their highs. In a bear market, the tendency is to close at or near their lows. By monitoring the changeovers one can find the top or the bottom of a trend. Incorporating a moving average will smooth the results, and minimize false signals…
Where Stochastic Indicators can be extremely useful, is where there is a divergence between the price, and the indicator. That is, where there is a decrease or increase in the indicator, where the price does not move, or does not move at the same rate as the Stochastic Oscillator. This is a clear indication that the price will move soon, in the indicated direction…
Of course, price movements are a result of market sentiment, and should not be linked absolutely to stochastic indicators.
A prudent approach is to use the indicators as a guide to the top or bottom of a market, and place stops should the indicator provide a false signal…
If you found this article interesting or even confusing, for more of the same, and information, videos and free stuff on option & stocks, go to tinyurl.com/mnukqy
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