Stochastics are a technical indicator for price momentum that looks at a price closing, then compares that number over a supplied price range. This is an oscillator that suggests in bull markets, a security will close near its a high, and in bear markets, it will close near a low. In english, this means that it measures the strength of price movement.

Buy signals through this indicators occur when %K moves above %D. Due to the unstableness in predictability for these signals, it is suggested that you wait till %K moves above %D at the 15-20% range. For sell signals, you should look for %D crossing below %K at the 80-90% range.

%K is the time duration in days, %D is the duration of the simple moving average (usually 3)

To help prevent false trade signals, adjusting the time period is useful. However, this signal should never be used on its own.

In particular, studies have been conducted that have concluded when using a K = 39 with %K above 50% as the buy signal, and %K below 50% as the sell signal. The price must be above last weeks high (buy) or below last weeks low (sell) for signal confirmation. Use with slow stochastics since slow stochastic is less smoothing, thus, shorter-term. Fast stochastics is for longer-terms.

Notice the %K crossing over the centerline in early 2007 indicated the sharp rise immediately after.