Stochastic Indicators and the Novice

For the stock trading novice, learning how to utilize the stochastic oscillator, or understanding what determines stochastic indicators, can feel quite daunting. When properly utilized, the stochastic oscillator can vastly improve your ability to buy and sell stock when the value is at its most advantageous to your portfolio. Combine your day trading wedges with your stochastic analysis and you can gain a more solid understanding of the trends that will most affect your ability to make an appreciable profit. 

The stochastic oscillator was a method that grew to prominence in the 1950s. The term stochastic is used to describe any system that exhibits behavior that is non-deterministic, or whose behavior is made up of a combination of actions that are possible to predict, and an additional set of actions that are completely random. The stochastic oscillator uses this idea to compare the current price, or closing price, of a particular product, with its price over time, in order to predict moments when the price might change. By viewing the extremes of the recent range, it is possible to predict when a sudden shift will occur.

There are some interesting variations of the stochastic oscillator. I'm quite fond of the StochRSI. As the name imples, it combines a stochastic oscillator with the RSI indicator. The combination works because both indicators are oscillators which brings me to the final point. Oscillators like the stochastic work best in a trading market. They become less useful in a trending market. You can establish the type of market you are trading, either a trending market or a trading market, by using the ADX indicator. If the ADX line is rising, you are in a trending market and you should put less of a weighting on stochastics or any oscillator tools. If the ADX line is falling, you are in a trading market and thus you should put more weighting on your oscillator indicators like the stochastic.