✔️ Information reviewed and updated in December 2023 by Eduardo López
A fundamental element in trading is to be able to identify when a price trend is active, no matter if it is bullish or bearish. When someone can identify that moment, they will be in optimal conditions to issue the corresponding market orders and, above all, they will be able to take advantage of the next price movements.
However, in order to identify these changes, it is necessary to carry out a technical analysis using different indicators, which are known as oscillators and some of their advantages are to give signals before the trend change occurs, as they work very well. in markets without a clear prevailing trend. Next, we will talk about the stochastic indicator and the Dynamic Zone.
What is the stochastic indicator?
It is an oscillator type indicator and is often used in technical analysis to evaluate the momentum or momentum of the price of a financial asset. This indicator was introduced in the 50s by the trader and analyst George Lane, and its key is before a change in a price trend occurs, there will be signs of exhaustion and loss of momentum from the preceding trend.
In order to identify the signals, the indicator compares the closing prices of an asset with respect to the price range in which the price has moved in a certain number of sessions. When an asset is in an uptrend, the closing price tries to approach the maximum prices of each session.
What is the Stochastic Dynamic Zone?
The Stochastic Dynamic Zone is an oscillator that moves between the values 0 and 100, it is responsible for providing the overbought and oversold zones. And unlike classical Stochastics, the limits of such overbought and oversold zones are not fixed, but mobile (dynamic and can adapt to the market situation.
Interpretation of the Stochastic Dynamic Zone
If the stochastic indicator is above its upper limit, the security is usually in an overbought situation and the trend is more likely to turn down. Conversely, if this indicator falls below its lower limit, the stock will be oversold and the trend will be more likely to turn up.
Thus, the buy signal will be defined when the Dynamic Zone of the stochastic crosses its lower band upwards, and the sell signal is launched when the Dynamic Zone of the stochastic crosses its upper band downwards.