Stochastics Indicators And Trading
by David Lundgren
Here, first-time STOCKS & COMMODITIES contributor David Lundgren reminds us that the stochastics
indicator is just a guide to understanding the trend for trading.
Stochastics, or any technical indicator for that matter, is just a mathematical formula that processes data
from one form into another. That's all it is. It is not the crystal ball that you have been in search of all
your life. It is simply a guide (and a very effective one at that) used to either confirm or contradict other
analyses of the most important data of all — price action.
Before you consider a technical indicator, first you must do your homework on price action, which means
studying hourly, daily, weekly and monthly bar charts of the market in question. This must then be
supplemented by studying intermarket relationships that affect the market that you are trading. Only after
you have established a directional bias for this market should you incorporate stochastics and other
technical indicators into your analysis, looking for signals that either confirm or contradict your expected
If your price analysis is confirmed by stochastics, then you can trade with more confidence in your
outlook. But if the stochastics indicator contradicts your conclusions, then you should either stay on the
sidelines and wait for the stochastics indicator to agree with you or simply trade in the direction of trend
analysis, but with less exposure than you would otherwise take on. Never trade against your trend
analysis just because stochastics contradict what you are observing.