Another indicator that attempts to alert the trader to overbought or oversold market conditions is the stochastic study.
There are three variations of stochastic lines: full, slow and fast.
The mathematical description for stochastic lines is something only a profoundly lonely mathematician can appreciate.
Stochastic lines use the bid and ask prices over the selected time frame to generate oscillating lines that compare the two.
Like the MACD, it provides better signals when large price swings are taking place. When the market is quiet, the stochastic lines will still venture into oversold and overbought territory, generating buy and sell signals, but actual price movement is negligible and the only effect here will be the potential to get caught in choppy, sideways markets.
Some traders interpret this indicator with the opinion that closing prices that are close to recent highs foretell a downward price correction. Others look for the stochastic lines to intersect to supply a trade signal. Still others believe that one of the lines forming two rising bottoms in the oversold region while prices continue lower is the signal for prices to reverse and go up.
As confusing as that sounds, a graphic depiction of stochastic support/resistance lines has many staunch advocates.
A new trader would be wise to test it in conjunction with other indicators, but not to base trading decisions on it alone.
Trying to remember which line is crossing which and under what conditions, overbought or oversold, during the pressure of actual trading could prove too complex to manage and also requires a lot of patience and practice to achieve an adequate degree of proficiency.