Do you use stochastics as a technical indicator?

  Sometimes, but not often. Stochastics attempts to anticipate movements up and down in stocks. Stochastics uses a 'fast' stochastic line and a 'slow' stochastic line, and looking at when and where the two lines cross, an investor is supposedly able to anticipate if a stock is peaking or bottoming. The problem is, investors try to apply stochasitics to every situation, and that just does not work.

Stochastics work best when a stock is moving sideways, either in a flat consolidation or in a rolling pattern. The rolling pattern is probably the best. This is because the pattern is repetitive allowing the investors to see how stochastics reacts to that particular stock when it turns up and down. You see, one of the main problems with stochastics is that gives false signals. Reading what is and is not a false signal is obviously critical in using stochastics successfully. You wouldn't use a shovel to drive a nail. You have to use the right tool for the right situation, and then you have to back test the tool on that stock to make sure it works for that stock. Again, on a stock moving sideways in a flat range or rolling range, stochastics can help anticipate moves. Those are the situations we look to stochastics, but then only as confirmation of price/volume action that we like. We hardly ever make a trading decision based on stochastics alone.


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