Every technical investor has his or her favorite indicators. I have tried and tested dozens of indicators. What I found was that using only one indicator did not work. It did not give me the buy and sell signals in a consistent and profitable fashion. The same conclusion was made using more than three. Just too much conflicting data. At this point I then mixed and matched the narrowed field of indicators in order to find the best system possible given my investment horizon.

Although Stochastics are preferred by some, it is not my indicator of choice. So why would I even discuss it? The reason is for educational purposes and to help you find a strategy that works for you. Who knows, maybe this indicator could be the missing piece in your investment strategy. There are countless strategies that work, but they have to fit your investment style.

Okay…Okay…time to share what I do know about Stochastics.

It is believed that some of the better signals are present when this particular oscillator moves from overbought levels back below 80 (signaling sell) and from oversold levels back above 20 (signaling buy).

Another use is to look for divergences in the similar fashion that we would do with the RSI indicator. By utilizing two key points that trend in the opposite manner as price, we might be able to conclude that the previous trend may soon end.

Note: Stochastics work well in stocks that are drifting sideways in strong trading channels. If the stock you are looking at is in an uptrend or downtrend you may find it difficult to rely on this indicator.

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