Technical Indicator>>Stochastic Oscillator (KD)
What’s Technical Indicators?
- Most of the calculations are based on the opening price, closing price, high price, low price and volume
- Ability to identify price trends and reversals, would be more objective than the candlestick charts, which can provide insight into the balance of momentum between bulls and bears.
- Different indicators may conflicting with each other, some are good at catching reversals, others are good at identifying trends, so it is necessary to select a few indicators and use them together.
Indicators are divided into 3 categories: trend following, oscillators and others.
1. Trend Following : Most effective when there is a clear trend, but less effective in oscillating ranges. Such as: moving average, MACD, OBV…
Features : It is a synchronous or lagging indicator that will reverse after the trend clearly reverses.
2.Oscillators : Inflection points can be judged in a oscillating range, but its signals can be immature and dangerous when a trend is formed. Such as: Stochastic Oscillator (KD), Relative Strength Index (RSI), William Percentage…
Features: It is a leading or synchronous indicator, often reversing before the K line
3.Other indicators can provide insights into popular psychology or the strength of both bulls and bears. For example: put/call option ratio…
Stochastic Oscillator(KD) – Calculation
The full name is Stochastic Oscillator, which is used for short-term trend analysis. It calculates the K-value(%K) and D-value(%D) according to the highest price, the lowest price and the most recent closing price in a specific period.
- 1st : Calculate %K:
Legends: Ctod——Closing Price of Today；Ln—— the lowest price in N trading days；Hn—— the highest price in N trading days； n——the number of trading days selected by the trader and used to calculate the stochastic indicator , usually preset to 9 days.
- 2nd : Calculate %D: Sum of 3Days (Hn – Ln)
Reaction of Market Sentiment
Golden & Death Crosses
- Golden (Death) Cross: Refers to the indicator pattern in which the %K crosses %D from bottom to top (top to bottom), usually accompanied with the indicator’s location of being on low (high) ground.
- A reversal is a bullish (bearish) signal that the market may reverse.
- Principle 1: The lower the golden cross position, the better, preferably in the oversold range (value below 20); the higher the death cross position, the better, preferably in the overbought range (value above 80). (suitable for volatile market)
- Principle 2: During the Uptrend, the Golden-Cross can increase the success rate of Buying, and it can be a Bull market when the KD indicator runs above the 50 line; During the downtrend, the Death-Cross can increase the success rate of Selling, and it can be a Bear market when the KD indicator runs below the 50 line. (suitable for trending market)
- Principle 3: In a downtrend, when a golden cross occurs, it is better to wait and see rather than buy directly. In a tops lowering market, it is difficult to have a good buying opportunity; Reversely, in an uptrend, a death cross occurs, and you should wait and see instead of selling instantly. In an ascending bottom market , it is rare to have a good opportunity to sell. (suitable for trending market)
Passivation
- It means that when the market continues to impact in the same direction, led the indicator to oscillates repeatedly at it’s limited position, causing the indicator to lose its guiding significance.
- The passivation phenomenon is more common in oscillators, because the extreme market situation exceeds the range of the indicator calculation period, so short-term indicators would more likely to occur with passivations.
- High Ground Passivation: The passivation phenomenon occurs when the indicator is above 80. The reason for this is that the stock price has been rising continuously and has been close to the position above the high and low prices on the 9th. (Refer to the previous page for the figure)
- Low Ground Passivation: The passivation phenomenon occurs when the indicator is below 20. The reason for this is that the stock price has been falling continuously and has been close to the position below the high and low prices of the 9th. (Refer to the previous page for the figure)
High & Low Ground Ops
The KD oscillates back and forth in the range of 0-100. In the upward(downward) trend, KD will always run above(below) 50. Therefore, when the KD value is greater than 50, it is a long market, and when the KD value is less than 50, it is a short market.
Divergence
- Top Divergence: When the price rises to a new high, but the top of the KD is lower than the height of the previous top.
- Bottom Divergence: When the price falls to a new low, but the low of the KD indicator is higher than the previous low.
- Best buy (sell) signal: The first bottom of the KD indicator is below the oversold line (overbought line) and the second bottom is above the oversold line (overbought line).
Bottom Divergence
It shows that the Bearish momentum is weakening, and the price is just falling inertialy. Once the stochastic indicator starts to turn up from its low point, it is a strong buy signal.
Top Divergence
It shows the strength of the Bullish momentum is weakening, and the price is just inertial. Once Stochastic turns down from the top, it is a strong sell signal.
Summary
- The KD indicator is an oscillator and is very sensitive to short-term price changes, so it will be more useful to combine it with other trend indicators as part of a trading system
- The value range of the KD indicator is 0 to 100. It consists of two lines, %K and %D. When the indicator is close to the high (low), it means that the price is close to the upper (lower) position of the high and low prices in the selected period.
- The assumption of the KD indicator is that at the end of an uptrend, prices close near the lows; at the end of a downtrend, prices close near the highs.
- When there is a bullish trend, the buying success rate of the golden cross is high; when it is a bearish trend, the selling success rate of the death cross is high
- To study and judge the KD indicator, first look at whether there is a golden fork in the near future. If there is no, then look at the high or low level.
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