Stochastics

The Stochastic oscillator compares where a security’s price has closed relative to its price range over a specifically identified period of time. This is a predictive indicator in that it gives advance signals for buying and selling.

The indicator has been developed from the basic observation that prices tend to close near their high in an upward trending market and near their lows in a downward trending market. Further, as an upward trend matures, price tends to close further away from its high; and as a downward trend matures, price tends to close away from its low.

How is Stochastics Used ?

This indicator is often used to predict trend reversal. The indicator tries to determine when prices start to cluster around their low of the day for an up trending market, and when they tend to cluster around their high in a down trending market. Lane's theory is these are the conditions, which indicate a trend reversal is beginning to occur.

The stochastic indicator is plotted as two lines. They are the %D line and the %K line. The %D line is more important than the %K line.

Ranges

The stochastic is plotted on a chart with values ranging from 0 to 100. The value can never fall below 0 or above 100. Readings above 80 are strong and indicate that price is closing near its high. Readings below 20 are strong and indicate that price is closing near its low.

A very powerful move is underway when the indicator reaches its extremes around 0 and 100. Following a pullback in price, if the indicator retests these extremes, a good entry point is indicated.

Reversal

Ordinarily, the %K line will change direction before the %D line. However, when the %D line changes direction prior to the %K line, a slow and steady reversal is usually indicated.

When both %K and %D lines change direction, and the faster %K line subsequently changes direction to retest a crossing of the %D line, but doesn't cross it, this is a good confirmation of the stability of the prior reversal.

Many times, when the %K or %D lines begin to flatten out, this is an indication that the trend will reverse during the next trading range.
These are just some of the important and popular oscillators and indicators. There are many more. You need to study and pick the one that best suits your personality, apply the indicator and specialize to maximize profits.

Impulse Trading and Early entry

• Impulse Trading

Impulse trading almost always never goes unpunished. Never take a position just because you feel the market is reversing. You MUST allow your condition to be met before you take a position. This is especially true in case of day trading.
The reason is very simple. When you don't make enough money trading your Edge, how can you hope to do so with something that you are unsure. If you are in it for the long run, abandon such behaviour. You may be lucky a couple times, but the law of averages will hunt you down easily.

• Timing Entries

One problem most day traders face is the timing of the entries. They say you can't time the markets. Wrong ! For intra-day trading there is no option but to time it well. Catching pullbacks after your condition is satisfied is a very good way of trying to beat the markets.
Example: Suppose you use a simple Stochastics buy signal to enter. If you scalp based on 1 min chart, allow the Stochastics to give a clean buy. In case of futures trading you always get a pullback to enter safely. The key of course, is how well you ride the trade when you are right and cut out the loser early.
Almost always, check the higher level time period chart. It helps if you are in the direction of the larger trend.