Stochastics

The stochastics oscillator is a measure of the relationship between the financial security’s closing price and the highs and lows. As such, it is best used for identifying overbought and oversold conditions. For that reason, it is often used with the MACD to improve signal accuracy, that is, to have better buy and sell signals.

Bearish Signal

How option traders can make use of stochastics?

For the purposes of this tutorial, we will discuss a generic example of using stochastics. We use a 9 day moving average measured over a 15 day interval  to chart the daily stochastics.This is a form of slow stochastics. If the stochastic falls below the red signal line, it is a bearish signal. If the stochastics rises above the signal line, it is a bullish signal.

Stochastics is a very wide topic and sometimes subjected to many different criticisms and interpretations. It is important for option traders to investigate this topic further before using stochastics as an indicator.

Read next: Relative Strength Index