Stochastic Oscillator Technical Indicators Analytics

This post shows how to implement a stochastic oscillator in Python. It’s based on my earlier post, Technical analysis of asset prices with Python.

The indicator’s goal is to predict price reversal points by comparing the closing price to previous price movements. Divergence occurs when the security price is making a new high or low that is not reflected on the Stochastic Oscillator. For example, price moves to a new high but the oscillator does not correspondingly move to a new high reading.

Stochastic overbought/oversold strategy

The stochastic oscillator is one of the technical instruments traders use to identify buy and sell signals and the trend direction. It measures market momentum and shows possible trend reversals. Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period’s trading range. Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold. However, these are not always indicative of impending reversal; very strong trends can maintain overbought or oversold conditions for an extended period.

According to an interview with Lane, the https://www.bigshotrading.info/ “doesn’t follow price, it doesn’t follow volume or anything like that. As a rule, the momentum changes direction before price.” As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal.

Overbought/Oversold Conditions

I see a lot of newbie traders on chatrooms commenting about price being overbought & not taking a trade. I’ve never gone for that never look at it, just exactly like you say if it’s high keep going up, if low visa versa.