Fast & Slow Stochastics

Stochastics also displays overbought and oversold conditions. Stochastic Indicators have 2 lines, the first is known as %K and the other is %D. These lines move in between the ranges of 0 and 100. %D is the moving average of %K. %D also develops better signals and is ultimately more important. Stochastics is a banded indicator, a reading over 80 is overbought, a reading below 20 is oversold. Typical settings are 14/3, 17/9, and 5/3.

The trading strategy is slightly different in comparison to RSI. Buy signals are created when the %K line crosses above the %D line in the oversold zone and then rises out of oversold, sometimes after a bullish divergence. Sell signals are created when the %K line crosses below the %D line in the overbought zone and falls out of overbought, sometimes after a bearish divergence.

Market can rally or fall within the overbought and oversold zones, so wait until it clears the zone to trade. Filter trades using the trend. Only take bullish signals in an uptrend, and only take bearish signals in a downtrend.