Without getting into complex mathematical formula’s, the RSI indicator measures the momentum or velocity of price tag movement or in plain English the RSI indicator measures whenever prices moved too fast too quickly. The Stochastic Indicator on another hand is a measurement of the placement of a current price just a recent trading range. The theory is that as prices rise, closes tend to occur nearer towards high end of their the latest range. Conversely, when prices decline, closes tend to be nearby the low end of the range. This is how the Stochastic Oscillator measures prices.
Both indicators are considered momentum oscillators because their primary role practically in most short term stock trading strategies should be to locate overbought and oversold industry conditions.
I can tell you from personal experience which the RSI indicator works better for lasting overbought and oversold price quantities, it tends to be less prone to false signals and works an excellent option for divergence analysis. When you are trading quick stock trading strategies that require analysis of market tops and bottoms, I highly suggest while using RSI. The Stochastic on another hand tends to work better with quick market swings that are not designed to signal market tops or bottoms but only a slight change or a correction within the trend. If I had to characterize the principle difference between the two oscillators, I would say the RSI is great for market tops and bottoms and divergence and also the Stochastic works great with normal pullbacks retracement strategies.
Find a Stock That’s Trending Or Sloping Clearly Either Up Or Down
You can either do a simple visual analysis or use on the list of indicators I previously demonstrated to discover a stock that’s trending strongly both up or down. Here is among the type of trend you ought to look for when looking for trading opportunities.
Traditionally, the Stochastic Oscillator is scheduled for long term market evaluation. When I say long time period I don’t mean months or years; long term is anything more than 14 trading days or roughly 3 weeks of time. The standard settings on the stochastic oscillator are set in order to 14 and 3. The 14 period is the slow period and the 3 period is the fast period. What I choose to do is adjust the slow period from 14 to 5. I find that most short term stock trading strategies are likely to respond better for short time period pullbacks or price retracements.
The two levels on the indicator you would like to pay attention to are the 80 and 20 levels. If the indicator lines cross above the 80 level, it signals which the stock is temporarily overbought. If the Stochastic moves below the 20 levels, it signals that the stock is temporarily oversold. These are standard settings for the Stochastic and I find the crooks to work perfectly with this pullback method
You can see from the example above, the Stochastic Oscillator, provides a great measurement for pullbacks in the trending market. You can create some very nice short term stock trading strategies with this methods or use it like a confirmation indicator when using basic visual analysis for pullback or retracement entry signals. You may also apply this indicator to a variety of markets such as ETF’s, Futures, Items and Currencies.
During the next few weeks I'll go over some additional techniques used to make a complete strategy while using modified stochastic indicator.