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You can use many strategies when looking at the stochastic oscillator.
Review the Lines
The first strategy is to look at the lines produced by the oscillator. You can use a computer program to produce an oscillator line based on the statistics reviewed over a series of trading periods. Look at how the line moves in between peaks and valleys. See that the line is relatively smooth and that it doesn’t have any significant jags. This gives the impression that shifts from low to high are consistent and controlled. You may also use this to determine how great the changes in a stock might be and how long it would take for the stock to move back and forth.
This works even better when you have a larger sampling to work with. You might notice that the shifts occur with varying intensities. Sometimes they might change dramatically. Even more importantly, you have to watch for any sideways movements within the lines. Any sideways moves that challenge the natural smooth flow of the stock might suggest that a stock has constant periods where massive buyoffs or selloffs have taken place.
Review Idle Periods
There are often times when the stochastic oscillator will stay around the same value. The oscillator could remain below 20 or above 80 for a few days at a time. An idle period on the oscillator suggests that the stock will continue to move along a certain trend for a while.
When the oscillator keeps on moving, it suggests that the stock is going to keep moving in the same direction it has been going. Unlike cases where the oscillator keeps moving up and down, it is a little easier to figure out where something will move based on how the idle periods for a stock might appear.
For instance, you might notice that the stock is falling in value while the oscillator is not shifting much outside of the 20 range. This shows that the stock is probably going to continue to be sold by people and that the stock will keep on going down in value. The stock could always get above 20 after a while, but it might take a bit due to the struggles that come with such a stock at this juncture.
Mix With Trend Lines
Have you taken a look at how a stochastic oscillator works on a trading platform? The odds are you might see a second line going alongside it. This is the trend line that shows how the stock is moving in value. Look at how the stochastic oscillator line moves along with the trend line on a stock. It is a sign that the value and the demand are meeting each other, thus giving you a clearer idea of how well a stock is being traded.
Watch how the trend lines are organized based on the total value of the stochastic oscillator. The odds of the stock price going down when the two lines meet at 80 or higher are better than when the two lines are separated from one another. This is also the case when the two lines are under 20.
Watch the Thresholds
Sometimes the oscillator will be slow. That is, it would take a while for the oscillator to go from being outside the 20 to 80 mark. You have to watch for when the stock finally breaks through one of these thresholds. By trading when a stock moves into the 20 to 80 range, you will have a better chance to have the stock move into a certain position.
In fact, it is even better if you set your own threshold within that period. This could help you to place a trade or an option when you can confirm that the stock is moving in one direction. For instance, you might use a stochastic number of 45 or 50. That is, you would watch for when the stock moves above 20 and see how well the stock goes alongside the oscillator. By striking when the number reaches 50 or so, you will enter into a position where you know for certain that the value will keep moving in one direction.
Of course, you will not make much profit at this juncture because the price is a little higher or lower than what you might have anticipated. Making a trade at this point is a good idea when you consider how the stock might be moving at this juncture. More importantly, you will prevent buying a stock that might stall. Although there is a chance that a stock could escape out of the extremes on the oscillator, there is also a chance that the stock will flat-line and not move much.
Watch for when the stochastic oscillator number is consistent and not changing. This is often a sign that people in the market are not fully confident in that stock. They might feel that a stock is not going to shift in value much or they are unclear about whether a stock is worthwhile. You have the right to get into a position at this point, but you should at least look at the overall history of the stock and any recent trends that took place to see what might come along as the value shifts.
