Stock Chart - Stochastic Oscillator

I read about Stochastic Oscillator from a book on day trading stocks. In this book, it recommends Stochastic Oscillator as one of the tools for day trading. This Oscillator can also be used as a tool for short term trading.

Stochastic Oscillator tells us the percentage of the recent close price of a stock against a period of its high/low range. Readings below 20 are considered oversold and readings above 80 are considered overbought. When the oscillator falls below the oversold level and rises back above it, it indicates a buy signal. When the oscillator rises above the overbought level then falls back below it, it indicates a sell signal.

To learn more about Stochastic Oscillator, just do a search for Stochastic Oscillator on Google and you will get tonnes of information. Or simply go to this Stock Charts site which gives a very good explanation.

For my trading now, most of the time I am using this Stochastic Oscillator to look for buy and sell signals for stocks. I prefer to use 25/75 range instead of 20/80 range as it shows a stronger signal. Or the other approach recommended by some gurus is to disregard the first break above/below signal. The second break above/below signal should be a stronger signal to indicate the divergence.

The problem of being too cautious and choose to wait for a stronger signal is that we may lose opportunities as we may be too late to enter position. Well, it is always better to lose opportunities than to lose money!

A challenge for me to overcome is the discipline to follow the rules strictly. There were a few occasions when the down trend was so tempting that I chose to enter postition before the divergence signal. I was caught as the down trend carried on. And the subsequent mistake was that I hurried to contra with a loss without waiting for the up swing. For most of those occasions, I could have waited a few days longer to eventually make a profit! Well, I know I always have to be prepared for a loss once I chose to enter a position, no risk no gain right!

One thing about me is that I am not a day trader, so I do not short sell as that requires us to close a position by the end of the day. Therefore, fewer signals for me as most of the time I am looking for buy signals.

We cannot be right all the time. Hey, if we can get it right 70% of the time, we should be happily making money : )

And if anyone out there have anything to share on this topic, I would really appreciate it if you could give your comments. We would want to be the minority that gains from this stock market!

PS: For some charts for SGX stocks, you can refer to the UOBKayHian site. Remember to use the "Setting " function to change the parameters, and the "Chart" function to turn on the display of the charts.

Link to Stock Wealth blog