The Stochastic chart, also known as the Stochastic Oscillator chart reacts to the asset’s most recent closing price when compared to its range. The chart incorporates market data from our proprietary data warehouse and is displayed as a line graph chart with a scale of zero to one hundred, illustrating the relative strength of the asset.
On the chart, there are two oscillating lines, one labeled Stochastic K and the other labeled Stochastic D. The K line represents the current measure, and the D line represents a moving average of the most recent three days.
The position of the oscillating lines can aid you in identifying whether the asset is regarded as underbought or overbought.
When the Stochastic reading is at 20 or below, it signals underbought; increasing the possibility of a price reversal to the upside. This may appeal to traders looking for an entry.
When the Stochastic reading is at 80 or above, it signals overbought, increasing the possibility of a price reversal to the downside. This may appeal to traders looking for an exit.
If the Stochastic reading drops from above 80 to below 50, it indicates that the price may move lower. Conversely, if the reading rises from below 20 to above 50, it signals the price may move higher.
When the two stochastic lines cross, reversal signals are also generated. If the Stochastic K line crosses below the Stochastic D line, a possible sell signal is generated. Conversely, if the Stochastic D line crosses below the Stochastic K line, a possible buy signal is generated. These crossovers may appear anywhere on the chart’s scale of zero to one hundred; however, signals above the lines at 20 and 80 are considered to be stronger.
Consulting the Stochastic chart in conjunction with a candlestick chart to judge the trending price action may also reveal reversal signals. For example, when a bearish trend reaches a new lower low but the Stochastic chart displays a higher low, it may be an indicator that bearish momentum is becoming exhausted and a bullish reversal is pending.