Stochastics... Measuring Momentum

Markets that are heading higher tend to close nearer the high than the low with the reverse being true in markets that are heading lower. This is what Stochastics is attempting to measure. While there are many ways to interpret this momentum study, the most accurate is to look for price divergence. When price patterns are making higher tops while Stochastics is making lower tops, this is called bearish divergence. As the name implies, this is a sell signal. Conversely, when the price pattern is making lower bottoms and Stochastics is making higher bottoms, this is bullish divergence.

Daily Bar with customizable Stochastics created by Trendsetter Software, trendsoft.com

Note the bullish divergence formed between June and July on this Cattle Futures chart.
Daily Bar with customizable Stochastics created using MacChart from Trendsetter Software.

 

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