This is my second blog and it is an the extension of my previous blog viz-a-viz Stock Market Analysis Tutorial. Through this blog, I've looked to capture about the various facts, specialties of Technical Analysis Software's that are available for analysis of stock market. I have made a comprehensive blog about various points that revolve round the technical analysis software's. I have specified and explained about the various technical analysis indicators also that play a huge role in the analysis of stock market.All in all, I have tried to capture the entire Market Trends Analysis and the software's that help in analyzing and hence help in better decision making. 

But the foremost thing that should be taken extreme caution is to have the good quality data feed. By quality standard, I mean to say the data with which analysis is being done should be standard with respect to Quality, Accuracy, Recoverability, Integrity, Stability, Simplicity, Price. But the thing is there are too many unconventional companies rising and emerging in the market and thereby fooling customers by claiming too good for nothing. Amongst them, one company I found to be very professional and customer centric is www.rtdsdata.com. With their simplistic and highly focused products and by maintaining the the optimum quality parameter, they are slowly rising to the occasion in becoming first choice for numerous traders both amateurs and experienced. The reason is simple if being comprehended. Providing 24 hours technical support adds to the cause pretty good as well. And when you have large customer base from every corner of the country, it does a world of good in maintaining levels of satisfaction. 

Technical Software's can do a world of good for traders. But we need to be aware that by just relying completely and blindly on these software's can also impose risks especially for one who who is not having a flair knowledge of the market. So there are two things which needs to be kept in mind. One is to choose quality data service providers. And the other is to trade with knowledge. These two factors should be taken utmost care to be successful in the world of stock market. 




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Market Share Analysis

What is Market Share Analysis?

 

Market share analysis is a part of market analysis and indicates how well a firm is doing in the marketplace compared to its competitors.

 
 Givon, Mahajan, and Muller proposed six factors to help estimate the value of market share 

• unit or dollar sales,
• user base (since piracy and brand switching effect),
• market definition (scope of definitions),
• scope of denominator (which other brands included),
• time frame length,
• product definition (brand, product line, or strategic business unit).

A market share analysis needs to take into account the following:

Total Market Size refers to the annual business volume in currency or in number of transactions;

Market Growth Rate refers to the Compounded Annualized Growth Rate (CAGR) taken over a period of 3 to 5 years;

Market Share is the breakup of market size in percentage terms, to help identify the top players, the middle and the "minnows" of the marketplace, based on the volume of business conducted;

Market Segmentation Some of the factors that determine the market are price, quality, speed of service, ease of maintenance, and points of distribution. By mapping on quality and price parameters, it is possible to identify graphically the spaces which are crowded by service providers and which are the relatively empty spots;

Key Players i.e.the top players in each segment of the market. The extent to which they provide premium quality, or premium service or price advantage, can help identify future target segments;

Swot Analysis. The strengths of players as well as weaknesses/areas of improvement are needed to combat the onslaught in a marketing warfare. Strength and weakness include brand equity, geographic presence, strong management/leadership, technological edge, and patent/copyrights.

Emerging Opportunities should be identified which could make the market grow faster/larger or acquire business more easily. Similarly, are there threat factors that could reduce the total market size. These could be due to regulatory guidelines, changes in fashion trends, consumer preference, macro economic events like currency crisis, import/export, war, natural calamity, or demographic shift;

Business Continuity Plan: While planning for market share analysis, the worse must be planned for to ensure continuity of the concern in the event of a calamity. Companies which have a continuity plan usually sustain shocks better and ensure achievement of targeted market share.

Target Market Share: Based on the above analysis, it is possible to arrive at the overall market size for the assessment period, and thereby decide on the volume of business the firm targets to achieve during the period. This helps determine the firm's targeted market share. This also helps budget for activities like budgeting for R&D, sales promotion, marketing, and training.



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Technical Analysis Important Facts

Day trading in stocks is risky, more so if you are untrained. However, if you have an eye for spotting market trends, you can make a neat pile in quick intra-day deals. There was a time not long ago when trading was a simple game of buying and selling stocks based on one's conviction. Now, technical analysis- a science of predicting future prices from historical price data-has given investors new tools. Technical analysis increases the probability of your call being right. But, we reiterate what we mentioned in our report,

How it works

Technical analysis is done on the basis of historical price movement plotted on a two-dimensional chart. One reason it has become popular is that anybody can look at the chart and see how prices have moved.
For example, in the chart, Easy Reading, you can see open, high, low and closing prices of the Bombay Stock Exchange Sensex on July 7, 2011. 

How to pick a stock

• Good volume and volatility are a must to gain from trading. While volume should ideally be at least 500,000 shares, the stock should have a high beta, or volatility. This means if the index rises 1%, the stock should rise by more than 1%. Those who don't understand the concept should see to it that the difference between intra-day high and intra-day low prices of a stock is at least Rs 10.

• Identifying the right stock and fixing a stop-loss level is a must. One must stick to the stop-loss. Generally, stop-loss is fixed at 1.5-2%, which means the stock is sold if it falls 1.5-2% below the purchase price. Big traders generally fix stop-loss at about one-third of the expected profit. For example, if they expect a stock to rise 10% in three days, they set a stop-loss at a point the price falls by 3%.

• Once you zero in on the stock, look at its volumes and price trends. Generally, higher volumes with higher price rise indicate an uptrend, but it should not be considered a thumb rule. "Volume is misread by a lot of people," says John Barrett, an instructor at Online Trading Academy, which teaches stock trading. Big volumes and large moves sometimes throw up big tops and bottoms, says Barrett. This means if both volumes and prices are increasing, it may be the last leg of the rally. 

Stock Trends

Identifying trends is important. But how do you spot a trend? It's difficult, as the market never moves in a straight line. A stock will never fall continuously on a given day and rise on another. Generally, higher highs and higher lows indicate an uptrend, whereas lower highs and lower lows mean a downtrend,

Analysts and market experts take the help of various parameters to confirm if a stock is a trade pick. The most used are available in any technical analysis software. These include 200-day moving average, relative strength index, moving average convergence divergence, or MACD, Fibonacci retracement and candle stick price chart. The terms may sound daunting, but software available nowadays makes technical analysis easy. 


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Analysing Market Trends

What is Market Trend Analysis?

An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. 

Market trends are the upward or downward movement of a market, during a period of time. The direction of any market at any given time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). " Markets move in waves", and in order to make money, a trader must catch the wave at the right time. 

Understanding the Trendlines

The chart depicts a Trendline being drawn from left of the chart to the right from the highest price peak to lower price thus displaying a Bearish Outlook

 

The chart here shows a trendline being drawn from left to right but the prices have been broken and not exactly collinear and are also closed above it. this phase indicates the beginning of new trend

The chart depicts the possible buying areas for Traders by the help of Trendline supporting boundaries

Channel Lines

When prices remain within two parallel Trendlines they form a Channel. When prices hit the bottom trendline this may be used as a buying area. Similarly, when prices hit the upper trendline this may be used as a selling area. So, channel lines helps traders a great deal in decision making. Waves or Patterns should be carefully noticed while doing analysis. 





Support Trend Line 

A Support Level is a price level where the price tends to find support as it is going down. Buying interest is strong enough to overcome Selling interest, keeping prices at a uninterrupted level.

Resistance Trend Line

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. Selling Interest overcomes Buying interest. 

The following chart depicts the Support Trend Line and Resistance Trend Line 

Conclusion

So, Trend analysis examines data to determine if certain actions or reactions occur in a Patterned Market Trend. Trend analysis helps traders and analysts in a different way as they attempt to make predictions about Market Direction and Price Movements. But all works good when you have the right quality of Data Feed into the Analysis Platform. If quality of real time data feed is not up to mark then the analysis becomes more or less insignificant and highly risky. There are many Real Time Data Service Providers in the country but very few are among them who really maintains quality standard. Some companies like Rtdsdata.com are very good when it comes to maintaining quality standard. Besides the fact of real time data, there is also another factor of Data Recoverability that plays a vital role as well in analysis. Lost Data or Gaps in data will act as a barrier towards effective analysis. Such vital factor should not be neglected and thus Service Providers like Rtdsdata.com are gradually becoming very popular when it comes to maintaining parameters like Quality, Data Recoverability, Prompt Technical Support. So traders will have to be very cautious while choosing the right Data Service Provider.

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How Graphs Can Help Traders to Improve Decision Making?

Not all traders make money in the market. So, why does it happen that some people earn profit in the stock market while others don’t? One of the main reasons could be inability to use graphs to improve traders’ decision making. Graphs are easy to understand and help traders interpret data at a glance. Moreover, EOD & Live graphs are unbiased and come directly from the source, which means there are no chances of misinterpretation or alteration from anywhere.

• Graphs are the fastest and easiest source that let you know about a particular stock and its market behaviors. Although, when you’re entering the market graphs alone are not enough but helps you significantly cut time and effort when it calls for quick decision making situations. 

 

• Graphs contain the complete historical background about a particular stock and helps traders in predicting the financial activity of the stock in the future. A professional trader can certainly temper financial trading decisions by using a graph system but for those who use it in isolation; they miss out on its full potential.

 

Example

 

For example, We all know that higher highs and higher lows mean a rising market. The trend is upwards. By properly analyzing these charts, graphs, various decisions and strategies can be formulated to help traders be at front at all times.

Conclusion

Usually, trading charts and graphs are used to mark market trends and entering the market without analyzing graphical background of the stock would be nothing but gambling your investments over a highly unpredictable and highly volatile market. Various traders have their way of using graphs but few uses, every trader can easily use is analyze price of stocks, rising and falling volumes, support & resistance levels  etc. Because traders can’t memorize entire data, trend of all stocks but graphs contain & show the entire data. These graphs and charts are definitely dependable indicators of all the factors that affect the market.



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Technical Analysis Softwares Specialities

What are the specialties of Technical Analysis Software's?

We know that technical analysis software's help in the effective analysis of the stock market movements. These software's are equipped with lot of specialties and are highly robust in their actions. The functions of these software's can be briefed into following- 

• The software’s are decision making terminals which helps traders and investors take the right trading decisions. 

• They give every trader with the power to automatically track important market movements and analyze the market in real-time.

• They help analyze the Currency Market in real-time.  

• The software gives us Buy & Sell signals that will help you make the right decision regarding various stocks that we have, or those that we could be interested in.

• They automate the charting, analysis and reporting functions that support technical analysts in their review and prediction of financial markets (e.g. the stock market).

Features of Technical Analysis Software's

There are many features of Technical Analysis Software's. But the one which can help traders with all the above mentioned points are the real winners. There are many software's which are dominant in some features like Back testing, Optimization etc but are not very effective in some other features like providing buy/sell signals etc. In such cases, a combination of one or more software's packages are needed to build a fully automated trading system. Some of the features that Technical Analysis Software Packages provides are as follows

Charting
  
A graphical interface that presents price, volume and technical analysis indicators through a variety of visual interfaces such as line, bar, candlestick and open-high-low-close (OHLC) charts. The chart data is presented as a time series and users typically have the ability to view historical data with varying interval (sampling) periods. Interval periods range from seconds through to months; short term traders tend to use frequent interval periods, such as 1 minute i.e. the price data is updated every 1 minute, whereas longer term traders tend to use daily, weekly or monthly interval periods when trying to identify price and technical analysis trends. Some charting packages enable users to draw support and resistance trend line or for example Fibonacci retracements to help establish trending patterns.

Back testing

Enables traders to test technical analysis investment timing strategies against historical price movement for one or more specific securities. Strategies are compared to each other using diverse performance measurements such as maximum draw down, annual profit. The objective is to try and develop a trading strategy based on technical analysis indicator criteria, which will generate a positive return. 

Optimization

It is a process of testing technical analysis indicator parameters, with the view to developing an investment strategy that generates the maximum return based on historical price movement. The optimization process is achieved through the fine-tuning of the associated technical analysis charting parameters. Typically technical analysis indicators have a range of parameters that can be adjusted, such as the interval period and the technical analysis indicator variables. For example the stochastic indicator has four parameters that effect its results: %k, %d, slowing period, interval period. Back testing of an over-optimized system will perform real-time. One way to remove over-optimization is by carrying out optimization on historical data and then performing future testing (sometimes referred to as 'out of sample') before making a final evaluation of a trading strategy.

Scanner

Scanners enable users to 'scan' the market, be it stocks, options, currencies etc., to identify investment opportunities that meet a user's specific investment criteria. Using a technical analysis scanner, a user could, for example, scan the market to identify oversold stocks that have stochastic and RSI value of less than 20% and 30 respectively.

Alerts

Alert software is used to monitor specific equities, such as stocks, options, currencies, warrants, etc., and provide a notification of when specific price, volume and technical analysis investment conditions are met. As an example, a person who uses technical analysis might want to be notified when the RSI indicator rises above 70, followed by the price falling below its 20 day moving average; using alerting software the user will be able to create an alert, which will provide a notification of when the technical analysis investment conditions are met. When alert conditions are met, a notification is typically communicated via an on screen pop up or sent as an email, instant message or text alert (to a mobile phone).

Custom indicators

Most technical analysis software includes a library of standard indicators (e.g. moving averages and MACD). Some software will also provide a mean to customize, combine or create new indicators.

Data feed

Technical analysis software is typically used with end of day (EOD), delayed or real time data feeds. EOD data feeds provide the end of day closing price for the given equity and is typically updated once a day at market close. Delayed data is typically delayed 15 to 30 minutes depending on the exchange and is the most commonly used data feed type. Real time data feeds provide tick by tick 'real time' data. Real time data is licensed on a per-exchange basis whereas delayed data is typically purchased on a regional basis, such as US markets, rather than an exchange basis.

Broker interface

Some technical analysis software can be integrated with brokerage platforms to enable traders to place trades via a user interface that they are familiar with. Typically these software providers try to differentiate themselves from the brokerage software through enhanced features such as automated trading.

Conclusion

There are many technical analysis real time data providers. But very few are genuine when it comes to maintaining standard quality for parameters like quality, price, after sales service, data accuracy, integrity etc. If you have always wanted accurate technical analysis on the stock market, but have not yet been able to find out the right way to do so, then www.rtdsdata.com or RtdsData Software may hold the key for you. Rtdsdata is one of the most comprehensive software out there in the market. It is almost like hiring a stock broker of your own who keeps you updated with the real time analysis of various stocks in the market.

 


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Parabolic SAR

What is Parabolic SAR?

The Parabolic Stop and Reverse (SAR) indicator combines price and time components to generate buy and sell signals. The Parabolic SAR is also effective as a tool to determine where to place stop loss orders. 

Parabolic SAR Buy Signal

We should buy when the price closes above the upper Parabolic SAR. When the Parabolic SAR changes from being above price to below price, then the stock, futures, or currency trader should "stop" and buy to cover their existing short sell and "reverse" direction and buy to go long.

Parabolic SAR Sell Signal

A sell signal is generated when the price closes below the lower Parabolic SAR. At the time that the Parabolic SAR changes from being below price to being above price, the trader should "stop" and sell to exit their existing long trade and "reverse" direction and sell to go short.

Uses of Parabolic SAR 

An effective use of the Parabolic SAR is determining where to place stop loss orders to protect profits or minimize losses. 

The Parabolic SAR is an effective stop loss placement tool for two reasons:

• It acts as a trailing stop. Rather than putting in one stop loss below where a trader entered a long position or above where the trader entered a short position, using the Parabolic SAR as a trader's guide, the stop loss is gradually raised for a long position and lowered in a short position, effectively locking in any profits.

• It acts as a time stop. Time stops are used by traders because they enter in buy or sell orders expecting a certain move to occur. If the expected move never occurs and the reason the trader initiated the trade is no longer relevant, then the trader should exit their trade. Similarly, the Parabolic SAR incorporates time into its calculation making sure a stock, future, or currency trade is working for the trader, if the trade is not moving in the desired direction, the Parabolic SAR will signal an exit.

Parabolic SAR Weaknesses

Parabolic SAR introduces some excellent concepts to technical analysis but leaves two major weaknesses:

• Trend speeds vary over time and between stocks. It is difficult to arrive at one acceleration factor that suits all trends -- it will be too slow for some and too fast for others.

• The SAR system assumes that the trend changes every time a stop has been hit. Any trader will tell you that your stops may be hit several times while the trend continues. Price merely retraces through your stop and then resumes the up-trend, leaving you lagging behind. 

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Market Analysis

What is Market Analysis?

Market Analysis is technical analysis procedure suitable for traders who trades stocks, futures, currencies. With the help of market analysis, a trader can observe the price movements from various perspectives and then can predict direction of movements of price. Market Analysis is a vital aspect in trading as it applies various standard and highly accepted statistical tools and calculations to forecast trends. A market analyst may look upon the historical data of a security or may perform analysis based on the real time data fed from exchange. 

Role of Market Analyst

An accomplished technical analyst knows how to apply the techniques, and more importantly, knows how to interpret the analysis to make effective trading decisions. Market Analysts rely on the market data based on which they decide on the trading. Market Analysts observe the price performance of various entities. They are well equipped with profound knowledge and the ability to understand the all the unambiguous situations that may arise due to trading. 

Where to get the data from?

• Data can be obtained from Market exchanges through various Data Service Providers. Market Analysts read data in a variety of data formats including the most common Amibroker and Metastock format. Data from the exchange are retrieved and then integrated into world class charting software's like Amibroker and Metastock which generates charts or graphs and shows price, volume movements updations. Quality of data has to be very good for performing accurate analysis. 

• There are many market data providers. But traders need to exercise caution while choosing the right data service provider. As there are many data providers which claims to be very good in the business but in reality are junk providers with poor quality data services. One very good data service provider is www.rtdsdata.com. They provide real time data into the charts of Amibroker and Metastock as well as provide round the clock technical assistance as well. There are certain factors like Quality, Price, Data Recoverability, Data Accuracy and Integrity, After Sales Support which should not be neglected. 

• Charts and technical analysis can also be obtained from various financial websites like finance.yahoo.com, google.com/finance, charts.com 

MACD Indicator

What is MACD Indicator?

Moving Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.


Components of MACD

There are three main components of the MACD shown in the picture below:

1. MACD: The 12-period exponential moving average (EMA) minus the 26-period EMA.
2. MACD Signal Line: A 9-period EMA of the MACD.
3. MACD Histogram: The MACD minus the MACD Signal Line.

MACD Formula

The MACD indicator is calculated as the difference between the fast and slow moving averages:

MACD = 12 Day exponential moving average - 26 Day exponential moving average

The signal line is calculated as a 9 day exponential moving average of MACD.

How to trade with the MACD indicator

If the MACD crosses down below the Signal line, but the histogram has not confirmed it by producing bars below the zero line, this is still considered a sell signal, but not as strong.A signal to sell is when the MACD has crossed below the Signal line. The signal is stronger if the histogram bars are also below the zero line.

The image below shows the MACD providing a strong sell signal:

• MACD has crossed down below the Signal line
• Histogram is below the zero line

If the MACD crosses above the Signal line, but the histogram does not confirm it by having its bars above the zero line, this also gives you a buy signal, but not as strong buy signal is given when the the MACD crosses above the Signal line. If the histogram is above the zero line, then the signal is stronger.

The image below shows the MACD providing a strong buy signal:

• MACD has crossed up above the Signal line
• Histogram is above the zero line

MACD Moving Average Crossover

Histogram is above the zero linMACD Moving Average CrossovWe know that the MACD line is created from the 12-period and 26-period EMA. Consequently:When the shorter-term 12-period EMA crosses above the longer-term 26-period EMA, the MACD line crosses above the Zero line.

• When the shorter-term 12-period EMA crosses above the longer-term 26-period EMA, the MACD line crosses above the Zero line.

• When the 12-period EMA crosses below the 26-period EMA, the MACD line crosses below the Zero line.

MACD Buy Signal

A buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).

MACD Sell Signal

Similarly, when the MACD crosses below the MACD Signal Line a sell signal is generated.

The MACD moving average crossover is one of many ways to interpret the MACD technical indicator. Using the MACD histogram and MACD divergence warnings are two other important methods of using the MACD.

MACD Histogram

The MACD Histogram is simply the difference between the MACD line (blue line) and the MACD signal line (red line).
 

• Convergence: The MACD histogram is shrinking in height. This occurs because there is a change in direction or a slowdown in the stock, future, bond, or currency trend. When that occurs, the MACD line is getting closer to the MACD signal line.
• Divergence: The MACD histogram is increasing in height (either in the positive or negative direction). This occurs because the MACD is accelerating faster in the direction of the prevailing market trend.

When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height. When the MACD histogram does not increase in height or begins to shrink, the market is slowing down and is a warning of a possible reversal. 

The letter "T" represents when the top or peak of the MACD histogram occurs. In contrast, the letter "B" shows when the bottom of the MACD histogram occurs. Notice how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future.

MACD Histogram Buy Signal

When the MACD histogram is below the zero line and begins to converge towards the zero line.

MACD Histogram Sell Signal

When the MACD histogram is above the zero line and begins to converge towards the zero line.

MACD Divergences

Bullish divergence occurs when the indicator is indicating that price should be bottoming and heading higher, yet the actual price action is continuing downward.Bearish divergence occurs when a technical analysis indicator is suggesting that a price should be going down but the price of the stock, future, or currency pair is continuing to maintain its current uptrend.

Conclusion

The MACD indicator is special because it brings together momentum and trend in one indicator. This unique blend of trend and momentum can be applied to daily, weekly or monthly charts. The standard setting for MACD is the difference between the 12 and 26-period EMAs. The MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that are historically overbought or oversold, the MACD does not have any upper or lower limits to bind its movement. During sharp moves, the MACD can continue to over-extend beyond its historical extremes.

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Stochastics Indicator

What is Stochastic Indicator?

A technical momentum indicator that compares a security's closing price to its price range over a given time period. The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. 

The indicator consists of two lines:

• %K compares the latest closing price to the recent trading range.
• %D is a signal line calculated by smoothing %K.

Calculation

The Stochastic Oscillator has four variables:

1. %K Periods.
   This is the number of time periods used in the stochastic calculation.
    
2. %K Slowing Periods.
   This value controls the internal smoothing of %K. A value of 1 is considered a fast stochastic; a value of 3 is considered a slow stochastic.
    
3. %D Periods.
   This is the number of time periods used when calculating a moving average of %K. The moving average is called "%D" and is usually displayed as a dotted line on top of %K.
    
4. %D Method.
   The method (i.e., Exponential, Simple, Time Series, Triangular, Variable, or Weighted) that is used to calculate %D.
    

The formula for %K is:

The Stochastic Oscillator always ranges between 0% and 100%. A reading of 0% shows that the security's close was the lowest price that the security has traded during the preceding x-time periods. A reading of 100% shows that the security's close was the highest price that the security has traded during the preceding x-time periods.

Stochastic Theory

The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the "%D".

Types of Stochastic Indicators

Stochastics Fast

It uses shorter Time Periods, and Shorter Averages – this creates more fluctuations but conversely also more false alarms

The Stochastic Fast is charted using the following two lines.

Fast %K: [(Close - Low) / (High - Low)] x 100 (shown as black line above)
Fast %D: Simple moving average of Fast K (3-day MA) (shown as blue “trigger line” above)

Stochastics Slow

It uses longer time periods and longer average periods – this creates a smoother flow and gives the ability to see trends clearer, the drawback is the Indicator lags price and is less responsive.

The Stochastic Slow is charted using the following two lines. 

Slow %K: Equal to Fast %D (3-day MA of Fast %K) (shown as black line above)
Slow %D: Simple moving average of Slow %K (shown as blue “trigger line” above)

Which is better? Well, the Stochastics Slow is usually preferred by most traders because is does not show as many false buy and sell signals.

Conclusion

The stochastics indicator is for the most part a range pattern indicator. It is used to determine overbought/oversold levels in a manner similar to the RSI. The oversold level is at 20, while the overbought level resides at 80. Although this is the most basic way of using this indicator, it is in fact rarely used because of the tendency to create false signals. Instead, as with most other oscilators, convergence/divergence patterns are sought between the price and the indicator, and then trading decisions are made sometimes supported by secondary concepts like the price extremes, or crossovers that can sometimes signal momentum changes.

Both for the fast and slow stochastics indicators, indicator crossovers are used to create trade signals on the basis of the movement of the %K component. The %K component is the faster moving of the two components, and when it rises above, or falls below the slower %D, a buy or sell signal will be generated.


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