To safeguard and forecast the performance of any security in the unseen future, traders use the miracle of technical analysis. It is a type of trading where historical data is used, and its predictability is harnessed to determine what the future holds for a particular asset. Oscillators are one such tool that is commonly used by the masses of technical traders. This training guide is here to make you profuse in the art of using the versatile tool called a Stochastic Oscillator. That is an accurate and trustworthy instrument to turn those investments into sleek profits.

Let’s start with an introduction to this tool. The Stochastic Oscillator, a.k.a, the Stochastic Indicator, track a financial asset’s momentum and defines if it is in an overbought or oversold situation. The oscillator comprises two components called the K% line and the D% line. The scale has a range of 0 to 100, and it showcases the different situations in the market by fluctuating between these 2 points. The main focus is predicting the price trend of an asset.

What is a stochastic oscillator?

A stochastic oscillator represents a trading indicator that shows overbought and oversold signals using directional momentum (the speed or velocity of price changes in the tradable instruments) based on the closing price. In addition, a stochastic oscillator identifies trend reversals using overbought and oversold price levels.

A stochastic Oscillator has a similar purpose as any other oscillator is called a leading indicator. This infers that the readings on the scale will lead to the change in existing prices by forecasting that there will be amends in the asset’s demand, supply, and price. This tool is handy; however, interpreting their results and combining them with your winning trading strategies can be a daunting task for many.

In this training guide, we will give you complete comprehensive insights into the working of the Stochastic Oscillator and the methods in which you can implement the results in your trading strategies and reap profits from your investments in the market. 

What do you need to look at the  Stochastic Oscillator?

Though most oscillators are created keeping in mind the needs of the market. Their layout is also similar. You cannot find any resemblance in their strong and weak points. These signals on oscillators are created to differentiate them from others, and hence reading them is also a varying task.

To read the results of the Stochastic Oscillator and helpfully interpret them, proficiency in the following subjects is essential.

• Types of Stochastic Oscillators.
• Construction of Stochastic Oscillator.
• Calculations of the Stochastic Oscillator.
• I was interpreting and understanding the signals of the Stochastic Oscillator.

Now, let’s dig deep into the topic and understand them with full consciousness.

Types of Stochastic Oscillators

Technical traders use two types of Stochastic Oscillators frequently. These two types are-

• Slow Stochastic
• Fast Stochastic

In demeanor, these two types essentially look the same. However, the working of these types is differentiated, and variations are present so that a trader calculates results for both. Based on your needs and the condition of the market. Your need for the type of Stochastic Oscillator will also fluctuate. 

The Slow Stochastic Oscillator works at smoothening the signals and is relied upon by the users. On the other hand, the Fast Stochastic Oscillators are sensitive to altercations due to price trends. Hence, it is more reliable in suitable conditions. 

No matter the differences between these Stochastic Oscillators types, the structural and functional components for both are the same. Therefore, the signals given out by both these types are similar in reading and interpreting the results. 

Moreover, your choice can lean towards any Stochastic Oscillator in any market condition. However, the all-embracing principle implies that both types’ interpretation and incorporation in a robust trading strategy remain unvaried. 

Construction of the Stochastic Oscillator

Just like the other technical trading tools, the Stochastic Oscillator also depends on patterns, charts, and historical data to pan out the prediction for future price trends. The appearance of this oscillator is similar to many others, and its components are as follows: 

• The Stochastic Oscillator consists of 2 lines called K & D. Their position on the scale determines if the security is overbought or oversold. The lines can also be faster or slower, which we will discuss later in the article.
• The scale of this oscillator has a range from 0 to 100. The K & D-line fluctuates over this scale and predicts the future price action of an asset.

The lines of a Stochastic Oscillator are placed below the price chart, the periods are laid along the X-axis, and the readings go from 0 to 100 on the Y-axis. In addition, there are peaks and troughs of lines K and D that come in sync with the asset’s price action. Therefore, the position of these lines derives meaningful information for future changes in the price trends.

In conclusion, the Stochastic indicator placed below the price chart showcases the momentum of the price action of an asset. The time of both charts overlap. However, the price action chart is responsible for determining the current price, while the Stochastic Oscillator is responsible for showing the future trend in price on a scale of 1 to 100.

Stochastic Oscillator Formula

The stochastic oscillator formula shows that we need to subtract the low for the period from the current closing price, divide by the total range for the period, and multiply by 100. This is because the Stochastic Oscillator’s lines fluctuate from 0 to 100, no matter what type of indicator it is.

However, the calculations for both types along the two lines vary slightly. Hence, we need to understand the calculations for both types separately to ingest the different steps involved. 

Calculations for Fast Stochastics

The three steps for calculating Fast Stochastics is are as follows:

• First, calculate K-line or %Kfast line.
• Then, calculate D-line or %Dfast line or %Kslow lines.
• Plotting K and D-line for results of Fast Stochastics 

Moving forwards, here is a comprehensive explanation of all three steps.

Step 1

The K-line or the %Kfast line is an integrated part of the Stochastic Oscillator. This line is only used for plotting the K-line. However, this also forms the founding stone for Slow Stochastic lines; hence this line is essential for the whole Stochastic indicator.

Hence, the %Kfast is plotted with the help of highest highs, lowest lows of an asset’s price based on a certain length of time, and then placing each find into the following formula:

%K= 100 [(C-Lx)/(Hx-Lx)]

C= Current close price

L= Lowest price over a small period

H= Highest price over a fixed period

X= number of periods used in a calculation

Step 2

After calculating the %Kfast line, you need to calculate the %Dfast line, which is considerably easier than the first step. This line is calculated by utilizing %K for three trading sessions and then averaging it. The formula for the same is:

%Dfast ( or Kslow) = 100[(%Kfast current period+ %Kfast-1 period+%Kfast- 2 periods)/3)

%Kfast current period= %Kfast reading in the current session.

%Kfast-1 period + %Kfast reading for the last trading session.

%Kfast- 2 periods + %Kfast reading for the trading sessions before the last session

Step 3 

After finding the %Kfast line and %Dfast line from the formulas provided in the steps, the last step is to plot these lines along the scale of 0 to 100, derive your conclusions from the results, and derive the accuracy of the calculation.

Slow Stochastics Calculations

Slow stochastics calculation is a little more intense process compared to fast stochastic. The reason is that there are more steps needed to be abided by in the Slow Stochastics method. These steps are as follows-

• The first step is to calculate the %Kfast line to aid the line K & D for Slow Stochastics.
• The next step is to calculate the %Dfast line or %Kslow line for Slow Stochastics.
• The third step is to calculate the D-line.
• And, the last step is to put the K & D-line on the chart for deriving results.

Now let’s see how you will follow these steps to calculate the Slow Stochastics and find beneficial avenues in the trading market.

Step 1

The first steps include calculating the %Kfast line as an auxiliary for the K & D-line. As we mentioned before, Slow Stochastics does not require you to plot the %Kfast, but it is the foundational stone for calculating the calculation of Slow Stochastics. Hence, the first step in calculating the types of Stochastics oscillator is essentially the same.

Hence, the formula to calculate the %Kfast line as mentioned above is-

%K= 100 [(C-Lx)/(Hx-Lx)}

Here,

C= Latest close

L= Lowest price in a specific period

H= Highest price in a specific period

X= number of periods that you use for a calculation 

Step 2

In the second step, the importance of the D-line for Fast Stochastics is similar to the significance of the K-line in Slow Stochastics. Hence, this step is pretty the same for both types of Stochastic oscillators. 

Hence, the formula that you would use here to calculate the %Kslow line or %Dfast line is:

%Dfast ( or Kslow) = 100[(%Kfast current period+ %Kfast-1 period+%Kfast- 2 periods)/3)

%Kfast current period= %Kfast reading in the current session.

%Kfast-1 period + %Kfast reading for the last trading session.

%Kfast- 2 period+ %Kfast reading for the trading sessions before the last session

Step 3

Step 3 in the calculation of Slow Stochastics is the extra step included in this type of Stochastic Oscillator, as Fast Stochastic does not require you to go through this step.

Here you calculate the %Dslow line, which is almost the same as the %Dfast line. Essentially, this is considered as the simple moving average for the %Kslow line over three trading sessions, and the formula to calculate the same is as follows-

%Dslow=100[(%Kslow current period+%Kslow-1 period+%Kslow-2 periods)/3]

Here,

%Kslow current period = This is the reading of the %Kslow for the current trading session

%Kslow -1 period = %Kslow reading for last trading session

%Kslow -2 periods = %Kslow reading for the second last reading session

Step 4

In this Slow Stochastic calculation, the %kslow calculated in Step 2 and %Dslow calculated in Step 3 are transformed into K-line and D-line, respectively. Hence, the last step is simple, where you only have to plot these lines on the scale of 0 to 100 on the chart indicating the price. With this step, your calculation for Slow Stochastic is complete, and now you can consider this chart to make trading decisions in your favor.

How to use  Stochastic Oscillator?

You can use a Stochastic oscillator to generate overbought (SELL) and oversold signals (BUY) when fast and slow lines cross each other. Additionally, you can create BUY positions if prices reach a new low while a stochastic oscillator fails to get a new low or SELL positions if prices reach a new high while stochastic indicator fails to reach a new high.

A stochastic oscillator is a momentum oscillator that traces the price trend of an asset for the future. However, many people in the tech trading field seem to interchange momentum with volume, which is incorrect. Hence, first, we will get the essential ambiguity out of the way by ruling out the differences between momentum and volume and why every prudent trader also needs to know about it! This will help you in making decisions that are more suitable for making profits from trading,

In the Technical Analysis Of The Financial Markets, John Murphy defines momentum as “measuring the velocity of price changes [over two-time intervals] instead of the actual price levels themselves.” At the same time, the volume represents the number of trades, transactions, or exchanges that have occurred in a specific period. Therefore, momentum is different from volume as it is not concerned with the number of transactions or exchanges over time. Still, it is more related to an asset’s price trend and forecasting it for future opportunities. 

Momentum rises invariably when a trend is at its peak or starting point. While it tends to slow down as the direction moves forwards, a reversal occurs. 

In the situation of a bullish market, the price at the time of closing will coerce the high prices higher than in the previous periods. On the contrary, whatever massive or small gains you acquire tend to lose their pace once the trend reaches its peak. To comprehend this better, when the %K and %D-lines of the Stochastic Oscillator are going towards the peaks and tumble down after a certain point, it indicates the signal altering, and the prices will likely also reach their peak position soon.

As we mentioned earlier, the Stochastic Oscillator reads the range of the price of a security for a selected period on the scale of 0 to 100. This reading is called momentum.

Continue reading to find out the essential points for reading and interpreting the results of the momentum study. After these basic pointers, another subsection will cover the momentum reading of the Stochastic Oscillator in general.

Pointers to comprehend high momentum readings:

• Whenever the %K is more than 80 on the scale, it is considered as high momentum by a Stochastic Oscillator.
• It is also a sign of the persistence of the bull market where the prices are higher than the previous high prices.
• When this momentum is at its highest, the security is overbought, which is a gesture that the prices will be corrected in the upcoming price trend. 
• The higher the momentum, the bigger are the modifications in the price.

Pointers to comprehend low momentum readings:

• When the %K-line is below 20, it is deemed as low momentum by the Stochastic Oscillator.
• It is a sign of the existence of the bear market, where the closing prices are lower than the previous low prices. 
• If the momentum is at its lowest, it is an indication that the asset is oversold, which is also a sign of correction in the prices in the next trend. 
• The lower the momentum. The smaller are the modifications in the prices. 

Understanding the trading signals of the Stochastic Oscillator trading signals

In John Murphy’s Technical Analysis Of The Financial Markets, oscillators signal investors in 3 distinguished ways. These are:

1. The signal of an asset being overbought or oversold when the signal line reaches the farthest point on the Y-axis. This is a sign of overextension, and there are distinct possibilities for a change in the direction of the trend.
2. During these extreme positions, if there is a difference between the movement of the price and the signal line of the oscillator, it indicates an impending change in direction. The concept of change in the price direction is popularly referred to as divergence in technical trading. 
3. When the oscillator moves past the Y-axis, it is an indication of a new or changing trend.

If you are often interested in prompt trading, the first two pointers from the adobe table will be helpful to you. However, when the midpoint of 50% is crossed on the Stochastic Oscillator on the Y-axis, it is not as prestigious as the indicators which have set their middle at 0.

In the Stochastic Oscillator, you must focus on the four signals mentioned below to indulge in a trade that harbors profits for you. Here is what these four signals entail:

1. %D-line in the upper or lower 20%: if %D-lines go beyond 80% on the scale, it is a sign that the asset is being overbought. Similarly, if the %D-line is below the 20% mark, it will point out an oversold situation. 
2. Second, %K (the last line) crossing %D-line (the slow line): Just like the collision of moving averages on a price chart, the collision of %K and %D-lines also have the same effect. When %K moves beyond %D, the price trend is moving towards a positive outcome and hence gives a bullish signal. On the other hand, below the %D-line, it will provide a bearish signal.
3. When the %D-line rises and falls: When the %D-line moves forward, it will indicate a favorable situation for people who hold a bullish sentiment for the market. While if the %D-line falls, it hints towards a favor of bearish sentiment. When this reading moves from an extreme point on the Stochastics indicator and starts falling and rising, this implies a correction in trend shortly. 
4. The divergence of the %Dline and Security’s price: Divergence means a disagreement between the price trend and the actual reading of the %D-line. If this persists at a high level, this divergence will indicate a decrease in the momentum and point out the weaknesses in the trends of the prices. Hence, it is also considered as a premature sign of reversal in the future.

Divergence is the original signal that technical traders depend on to derive results through trading out of the four mentioned signals. George Lane, the inventor of the Stochastic Oscillator, stated that only one signal is most reliable. That is the existing divergence between the price of the stock you are trading for and the %D-line.

In conclusion to this part, you should remember that, like any other trading tool, a Stochastic Oscillator will present results and readings in various ways. Still, not every piece of information that you see gives you a guarantee of being accurate. Hence, you must understand the importance of qualifying the signals that have high chances of being profitable.

How can you enhance the reliability of the Stochastic Oscillator?

The Stochastic Oscillator is famous and reliable in the technical trading market. However, you cannot trust all its signals because not all of them will create favorable results. Hence, to make the indicator a part of your trading strategy, you need to understand its nitty-gritty and how you can rule out the unreliable signals generated by the oscillator. 

Furthermore, you can not rely solely on the Stochastic oscillator’s signals; you must combine its results with other trading tools and instruments to ensure accuracy.

Hence, to modify the reliability of a Stochastic Oscillator, you need to understand how to eliminate the shortcomings of the indicator. Here are some commonly used ways to do the same:

• Managing and altering periods for the change sensitivity. 
• Increasing and decreasing overbought/oversold. The threshold limit is 85/15.
•  Merge 2 Stochastic Oscillators.
• Combining the Stochastic oscillator with other tools and indicators.

Moving forward, we will discuss how you can implement these points onto your Stochastic indicator.

Managing and altering periods for the change sensitivity

That is the easiest and most prominent method to enhance the trustworthiness of a Stochastic Oscillator. It would help if you went to the settings option; the indicator will be set to find the %K-line for 14 trading sessions. However, you might also want to tweak the indicator’s sensitivity based on your trading preferences to solidify its reliability.

Here are some foundational rules on how you can tweak the sensitivity of Stochastic Oscillators by utilizing period input:

• More sessions– few in counting, but the signal becomes more robust. The default setting for trading the %K-line is 14 sessions, and the %D-line is found out by calculating and smoothing different periods. To increase the reliability of this indicator, you need to go to the setting and increase the number of sessions for the %K-line. However, this also entails that the frequency of signal production will take a hit.
• Fewer Periods- Signals will be responsive but increase the propensity for false signals too. There is always a scenario where you will need your indicator to showcase sensitivity for price changes than what is already decided by the default settings. In such cases, you can enhance the responsiveness of stochastic signals by reducing the number of sessions by %k. For example, you would desire your indicator to be more sensitive when day trading or scalping, which has a volatile nature.

You can also take another step that includes placing the slow and fast stochastic results with each other, comparing and contrasting the sensitivity, and evaluating the reliability of the signals. 

They are increasing and decreasing overbought/oversold. The threshold limit is 85/15.

According to the default settings, a Stochastic reading beyond 80% indicates an overbought situation, while a reading below the 20% mark indicates the oversold condition.

With these default settings, you can operate in the trading market quite swiftly. However, if you want to enhance the preciseness of the oversold and overbought signals, you can take another more safe outlook.

To do so, you can modify the limit for the overbought signal from 80% to 85% while reducing the movement for oversold to 15%. In this way, you will limit the threshold for the indicator and amass better results as only the signals passing your criteria will be considered.

Though this strategy is famous for improving the reliability of the Stochastic indicator, you should keep in mind that your reliability will increase. However, you also stand to miss a plethora of profitable opportunities in the market. Hence, you should be prudent and learn to pull out of this conservative approach and move towards a more sustainable system.

Merging 2 Stochastic Oscillators

The other way to increase reliability is to take the conservative approach and find the direction of trade and a more open setting where you will determine trade entries. Here is how you can do this:

• The first step is to find the direction of your trade and minimize the unfortunate chances where the market can move in the direction contrary to your needs.
• The second step is the relaxed settings for establishing the trade entries, and hence you don’t miss out on any fruitful avenues.

While this method might look easy to follow in theory, applying it to your trade practice is not an easy task, more so for day traders or people who trade in a small time frame. The reason is, when you are trading every day frequently in real-time, tweaking settings all the time will be agitating, and you might also find yourself losing out on good opportunities. Hence, to overcome this problem, you can use 2 Stochastic Oscillators setup on the trading chart to reach your trading goals.

One of these indicators can be conservative, which you can use to establish the price trend direction. The other Stochastic Oscillator will have a relaxed setting that will help find the best time to exit or enter a trade.

In this combination of 2 Stochastic Oscillators, what setting you keep depends on various factors like the class to which the asset belongs, the volatility, etc. To hit the sweet spot in this setup, you need to rely on experimentation and hit and trial methods. However, you can start with a 21-period conservative approach and an 11-period relaxed approach to meet your goals in the trading market. 

Can I use Stochastic and RSI together?

Yes, you can use RSI and Stochastic Indicators together. Additionally, there is RSI Stochastic Indicator, and we wrote a review about it.

As mentioned earlier, the Stochastic Oscillator is a valuable tool if used with other instruments and indicators. Still, if you use it as the sole detector of beneficial changes in the market, it will not be as effective. Hence, your best take is to combine it with different technical tools.

Here is a list of several tools that you can use with Stochastic Oscillator and complement the same most effectively and make it more reliable.

• RSI or Relative Strength Index
• Candlestick pattern
• Support and resistance

Now, let’s discuss how these tools work and how they can be used with the Stochastic oscillator.

RSI or Relative Strength Index and Stochastic Oscillator

Like the Stochastic Oscillator, the RSI is used to establish an asset’s oversold and overbought situation in the trading market. 

Even though the purpose of both these indicators is the same, the calculations and methods for determining oversold and overbought situations aren’t. 

You can use the readings of RSI as a green signal for the trading signals given by the Stochastic indicator and thus increase the definitive chances of profits from a trade.

When the readings of the RSI coincide with the indications of the Stochastic indicator, you can be assured that you are making the right choice and you have a high success probability.

Candlestick Patterns and Stochastic Oscillator

Candlestick patterns are one the most commonly used forecasting tools in technical analysis. Candlesticks are of various types. However, on a higher level, everything is assimilated into two categories-

• Reversal candlestick patterns 
• Continuation candlestick patterns

Now, we will discuss these patterns in detail so that you can leverage them to improve the reliability of your Stochastic indicator readings.

Reversal candlestick pattern and Stochastic Oscillator

This is candlestick pattern is handy in determining the upcoming price trend and whether there will be a reversal for the security. When the status of these patterns coincides with the readings of the overbought and oversold situation by Stochastic Oscillator, it hunts towards a strong propensity for a reversal in the trend. Hence, the Reversal Candlestick pattern acts as a verification source for doing reversal trading. 

Continuation candlestick pattern

This candlestick pattern represents its function from its name only. Sticking to its name, a Continuation Candlestick pattern works to trace the continuation pattern in the market. In simple languages, it finds out if the trend will sustain or not. Hence, if you are intrigued by reversal trade by analysis through Candlestick pattern, and witness a continuation candlestick pattern, move away from that trade as it is risky.

On the other hand, if your Stochastic reading is directing you towards a trade, you can consider the continuation candlestick pattern as a confirmation sign to trade in that stock.

Support & Resistance

The Support & Reversal are the points on the price chart where the probability of a trend’s reversal is prominent. These are the indicators of supply and demand for assets or stock in the market. 

For instance, when the price falls near the support point, and the market is brimming with demand, the traders will enter profusely, rising further. In the same way, when the asset’s price hits the resistance point, the traders will hurry and sell their security to gain profits and lead to a fall in prices.

Hence, if the Stochastic reading has overbought and oversold situation collide with the Resistance and Support level, it is a sign that a reversal is imminent in the market. Hence, you will be motivated to trade in reverse once you combine the results of Support and Resistance and the Stochastic indicator.

Way to trade through the Stochastic Oscillator

Now that you have comprehended the calculations, construction, types, and confluence of different tools with the Stochastic Oscillator, you have to implement them and trade in the market prudently. 

The Stochastic Oscillator is compatible with different trading strategies, but the following two methods work exceptionally well.

• Overbought/Oversold trading strategy.
• Divergence trading strategy

You can easily read the oscillator’s signals, but these strategies will help you evaluate those results and make beneficial decisions. So, let’s understand these strategies one by one.

Divergence trading strategy

Divergence means the scenarios when signals from the Stochastic Oscillator or any other indicator disunite from the actual price action on the chart.

Put, if the asset’s price is rising even after a high stride. Still, the indicator differs and has shown the lines below the previous reading; this nonalignment of the current actual price and indicator is termed the divergence. Similarly, if the price goes down after still being low, but the Stochastic reading differs, it is still termed as divergence.

To sum up, divergence is the gesture the momentum in the market is weakening, and it is considered a pre-sign of reversal. Hence, it is an invaluable asset in determining reversal trades. 

We will now discuss how you can use Stochastic Oscillators to define take-profit targets, trade entries, and stop-losses through this strategy.

Establishing trade entry

To find a trade entry through the Stochastic Oscillator with the Divergence trading strategy, you should understand how to determine the divergence on a price chart with the help of the oscillator.

For the Stochastic Oscillator, you will use the %D-line to determine the divergence between the actual price and the oscillator reading. For instance, when the %D of the Stochastic Oscillator is going in opposition to the price action line, it is the confirmation of DIvergence on the price chart.

To indulge in divergence trading through the Stochastic indicator, you need to look out for the following two signals:

• The bearish signal, which is prominent in the bull market. This signal appears when asset prices are at their peak, then they go low, then again come to high peaks. The %D-line dips and goes down more than the first peak. This is an indication to sell as there is the possibility of a downtrend in the market. 
• The bullish signal is prominent in the bear market. When the security’s price is going low, there is a short bullish rally, and then the price goes even lower. Considered when the %D-line does a low rally and then reaches a higher low. This recommends the trade to buy as there will be an uptrend.

To follow both signals, you should wait until the oscillator signal diverges beyond the 80% resistance mark on the Y-axis or the 20% support mark on the same axis. After you spot the divergence signal, you need to wait until %D is within the boundary of regular trading, i.e., 21% to 79%, and then trade.

Leaps and bounds can further enhance the validity of your trade entry by amalgamating other trading tools like support and resistance, candlestick patterns, etc., along with the Divergence trading strategy. 

Hence, technical analysis would always be beneficial to trade according to the divergence signs and other techniques to get the best results. 

Establishing a stop-loss target

Divergence is considered a sure shot sign for determining the decreasing momentum and the upcoming reversal in the price action. However, the timing for the reverse is often not present or is blurry. 

When the momentum is slowing down, the trend can still keep going in its direction, which can drown those traders who bet on a future reversal in trend with huge losses. Hence, risk management is an indispensable tool for any trading strategy and the divergence trading strategy.

The stop-loss points can be set up at fixed prices and not on oscillator’s reading points because the latter is present in percentage and not monetary terms. Hence, if you want to establish the stop loss points under this strategy, you need to focus on signals from tools other than the Stochastic Oscillator. 

Here are examples of the tools which you can use for determining the stop loss under the Divergence strategy:

• Fibonacci retracement and extension: This tool is similar in some terms to the Support and Resistance technique. Different levels are determined with the help of Fibonacci numbers, and by the Support and Resistance, it also determines points where the possibility for reversal is the highest. Hence, based on the trade direction, you can fix the stop loss point beyond or below the Fibonacci Retracement or Extension point that cuts close to your trade entry point.
• Support and Resistance: The support and Resistance point indicates high chances of a reversal in the market. Hence, when trading in a bullish market with a divergence strategy, your stop-loss point will be below the nearest support level. While in the case of bearish trading, the stop-loss point will be above the closest resistance level.

Additionally, trailing stop loss also works efficiently to manage divergence trades for the price increase and when the asset gains more momentum in the current direction.

Establishing a profit target

You can establish your profit target in several ways through the take Divergence trading strategy.

• When taking a conservative approach towards trading, it is recommended to exit divergence trades if you want to gain after the %D-line comes to the 50% mark because the 50% mark on the Stochastic scale determines that the momentum is neutral.
• If you take an aggressive approach to trading, you need to exit the trade in the bullish market after the %D-line crosses 80% points on the Stochastic indicator. 

You can also consider signals from complementing tools and techniques like Support and Resistance to establish the take profit points. 

Overbought/Oversold trading strategy

This is the most commonly used trading strategy in a technical trading realm that traders rely on using the Stochastic oscillator.

As we stated before when the %D or %K-line moves beyond the 80% mark and below the 20% market, the asset is overbought and oversold. These two situations are early signs of either a reversal or correction in the trends of the price. And the overbought and oversold strategy works on this principle.

Additionally, you should keep in mind that just like the Divergence trading strategy, the overbought/oversold approach also gives out excellent results when combined with other trading methods and instruments. Hence, you always recommend using a Stochastic indicator with different strategies and making your decisions based on multiple readings. 

Now, let’s find out how you can set the enter and exit point and leverage this strategy to harbor profits from trading. 

Establishing trade entry

In the Overbought/Oversold strategy, you sell short or sell when the asset is overbought and trade in the bullish market when the asset is oversold. 

Here is how you can enter trade under this trading strategy:

• If the %D-line goes below the 80% point, you will short-sell the security, as it indicates the market’s downtrend. For validation, you should wait until the %K-line goes below the %D-line before you trade in the market through this strategy.
• If the %D-line moves beyond the 20% mark, you should enter the long or bullish trade because it defines an uptrend. However, if you are hesitant because of the risk involved, you should wait until the %K-line crosses the %D-line.

In conclusion, this strategy works wonders when used along with other complementary trading strategies and the Divergence trading strategy. Hence, your goal is not to use this strategy in isolation and cross-check the results with additional tools for trading success. 

Determining stop-loss target

When the Stochastic indicator rises beyond 80% and falls below the 80 mark, a technical trader involved in the Oversold/Overbought strategy takes a short trading position under the impression that those prices will soon fall. 

On the other hand, if this situation does not occur, and the %D-line goes above 80% mark points, the trader should exit the trade to prevent losses. 

In the same manner, after you do a bullish trade entry, and you don’t see any sign of reversals and the %D-line goes below 20%, it is a signal that you should exit the trade to avoid losses.

Establishing a profit target

You can follow multiple paths in the Oversold/Overbought trading strategy to set up the profit target. To achieve this objective, you can use the readings from the Stochastic indicator in isolation or combine them with the signals of other technical analyses.

Here are the two methods you can use to step up these profit levels through the combination of the Stochastic indicator and the overbought/oversold strategy.

• Irrespective of the buying or selling or buying status, you should exit the trade to accumulate profits if the %D-line reaches the 50% mark. The 50 mark is a point of neutral movement and is a good point for booking profits for risk-avoiding traders.
• If you are a trader who loves to take chances on a trade, you should exit a trade when the %D-line is near the oversold region and exit the bullish trade at the point when the %D-line is in the overbought scenario that will bring you profits. 

Moreover, you can also use other technical tools to find the take profit target through this strategy. Some of these tools are:

• Pivot points

• Chart patterns

• Candlestick patterns
• Fibonacci retracement and extension levels

How to day trade with the Stochastic indicator? 

Day trading has become the cherished career of many after the emergence of apps like Acorns and Robinhood and the rising popularity of apps by Fidelity and Charles Schwab.

When using oscillators for day trading, the first and foremost consideration is that you need to set the periods for a shorter span.

In the case of the Stochastic oscillator, you must set up fewer periods, majorly with five, seven, ten highs, and lows instead of the regular 14 for calculation of %K. This will trigger fluctuation in the Stochastic indicator readings and reveal more trading opportunities that might pass you by.

Furthermore, even the price chart should be set at a short measure, price changes, and intra-day, when you want to sell and buy securities on the same day.

The most practiced day trading strategy in the Stochastic Oscillator is to spot the trading signals on the weekly chart and then assess the daily chart. If this signal is still on the chart, you move to 4-hours, then hourly, and go as low as 15 mins. If you see the movement in each graph, it is a sign to enter the trade with the help of a Stochastic indicator. 

Pros and Cons of Stochastic Oscillator

Even though it is a reliable tool, the Stochastic Oscillator is not immune to all drawbacks. It has its own unique set of pros and cons that every trader should know about. 

Hence, to use the Stochastic Oscillator judiciously, you need to understand these advantages and disadvantages and amalgamate them into the trading strategy. So here is the list of the same.

Pros of Stochastic Oscillator

Read below to find the key areas where the Stochastic indicator excels:

1. It is moderately easy to merge the Stochastic Oscillator with your trading strategy. 
2. The signals from the Stochastic Oscillator are easier to understand, assess and evaluate. 
3. Divergence signals can also be extracted from Stochastic indicators. If you express it accurately, you can acquire surety in identifying reversals. 
4. The stochastic indicator also helps find out the overbought and oversold situation in the market and allows traders to make prudent decisions.

Cons of Stochastic oscillator

Read below to find the areas where the Stochastic indicator faces drawbacks: 

1. If the market is highly fluctuating, the Stochastic indicator produces false signals.
2. The Stochastic Oscillator is visually more complex as compared to other tools and indicators like RSI.
3. If you only rely on the results of the Stochastic oscillator and do not combine it with other tools, you will not get authentic answers.

Conclusion 

The Stochastic Oscillator is a reliable technical indicator with the primary goal of finding if a security is overbought or oversold and is prominent in the technical trading realm. Even if you are not a frequent user of this tool, it is helpful to know how to construct, calculate and implement the device into your trading strategies. 

Stochastic indicators easily find out where the momentum is going and if there is a possibility of a reversal in the market. Hence, facilitating you with insights to find the troughs and peaks in the bull or bear market. 

It is a great tool when combined with other technical devices and techniques. Still, one cannot voice for 200% assured results if this indicator is used without any auxiliaries to support the conclusions. Hence, you should be aware of the tools that can boost the Stochastic oscillator findings.

At last, no matter what type of trade you are interested in, research, experimentation, and exploration with the Stochastic Oscillator are the integrated parts of a successful trading session that meets your trading needs. Of course, if you are not clear about your conduct, you should consult an investment expert or broker before indulging in any capital or fundamental technical trading. 

When an individual considers buying and selling monetary contracts within the same trading day to avoid the unmanageable risks of overnight trading, and negative price gaps that come along are known as day traders. Yet, day traders take dicey chances to claim the high bounty.

How Does Day Trading Affect the Economy?

Day trading helps the world economy because it increases the liquidity in the market. In addition, day trading is indirectly beneficial for the economy because it increases competition and lowers world prices, and indirectly helps consumers by raising the purchasing power of their income.

Additionally, trading breaks down domestic monopolies, which face local competition from more efficient foreign firms!

The fact that day trading manages the markets’ prices and provides liquidity for the investors brings in the consideration that it is beneficial but inexplicitly.

However, when done with expertise, one can help in boosting the requirement for commodities of local economies.

Let’s take a look and understand how an individual can be a day trader. Also, we’ll look into how local and global economies are affected by day trading.

Characteristics of a day trader

An individual can be considered a day trader when buying and selling financial instruments (positions) within the same trading day. The trader does this to reduce the risks associated with the price gap between one day’s close and the other day’s price at open; also to escalate the profits gained from a sole trade. However, as marked earlier, day trading requires expertise, which in the end, also brings pricey risks of failure for the traders, ultimately resulting in an excessive risk of trading.

To bring in the most out of every contract, day traders keep a constant eye on the stock markets and prepare a handful of approaches to succeed.

An additional requirement of which the day trader needs to be aware is, though one can gain huge benefits from day trading, it still has the uncertainty of losing everything in a single go.

Below mentioned are some salient points regarding day trading that one needs to keep in mind:

Day trading and investing are not the same

Investors tend to reserve positions for a longer time, whereas day traders hardly engage in a trade for at most two days.

Day trading fails to assure big fish.

As compared to other trading approaches, day trading is quite tricky and complex.

Day trading can be nerve-wracking.

Day trading demands one’s constant commitment and awareness of the market. Day traders put in their efforts throughout the trading hours. They also have to keep a continuous check and keep their facts in check, even during their time off. If an individual considers having a relaxing lifestyle without any hustle, then the job of a day trader should not be considered, as day trading may get exhausting.

Advantages of day trading

If an individual has good enough knowledge of how trading occurs, then day trading can bring you an n-number of benefits. So let’s take a look at why day trading is worth a shot.

Easy reach to global markets

Day trading has become a significant part of the enlargement of foreign markets. To safeguard the rate of change of stocks, a day trader deals with positions throughout the day. This change results in creating an equilibrium in a particular contract/position. Anyway, this remains a short-lived remedy for the growing markets.

Apart from this, day trading ensures companies with regular buyers. To trade a position, the day trader needs first to acquire that position. This uplifts the organization because eventually, a customer or buyer needs to purchase the funds, which ultimately boosts the prices, resulting in the company’s growth.

Prosperous day traders pass their fortunes to small markets.

A succeeding person always brings success to local markets as well. We are very well aware that if day trading is done correctly, it always leads to winning, which ultimately results in the trader getting lucky and successful. This success also leads to a boom in the local market as the purchase of local commodities increases, which leads to a rise in its demand. This ends up resulting in more jobs for the country. Less the number of jobless people, the higher the economy.

Easy cash flow in markets

The higher number of buyers and sellers in the market results in liquidity in the markets. Moreover, as day traders purchase the positions daily, they ensure that they can hand over the monetary amount to the trader and investors at the earliest.

This allows the buyers to liquidate their stocks at their convenience, which was only possible because of the day traders. Unknowingly, day trading is most beneficial to people interested in investing their money in protracted stocks or gold. 

Drawbacks of day trading

We all know every coin has two sides; similarly, while day trading may seem quite a money-making strategy, on the other hand, it too has its fair share of drawbacks.

Here are some of the reasons contradictory to the previous section.

Relying on your charm

Humans and their belief in superstitions have always been the villain of day trading. Yet, it is amongst the popular arguments in the case of trading.

Most people consider their luck as their prime strategy during day trading, while we are very aware that luck plays the magic; instead, it’sit’s magic of hard work and knowledge of the day trader. Relying only on your stars is an awful idea while trading and even more pathetic in the case of day trading, as day trading draws in higher risk factors.

We, humans, tend to exaggerate things, and so happens to be the case here. People start feeling overconfident when things start turning in their favor. This results in people investing more and more and taking higher risk factors. They begin to have this belief that nothing will go south.

Hindrances behind trading platforms and apps

The internet has leveled up and given the path to many people seeking some source of income. Moreover, there has been the freedom to a persperson’sent. It has allowed them to release their music album without any famous branding; it has allowed one to publish their book under their publication. If the internet has caught the attention of such popular industries, how could it not catch the attention of the trading field?

With the growth of the internet, there is also a fair share of growth in trading platforms and trading apps. An individual can start their investment and day trading with a minimum share of $100 as well. Though this might seem appealing to many of us, the truth is that these platforms do not provide free services ultimately. These apps constantly prompt a user to continue investing. Through this strategy, these platforms keep users in the illusion of investing while earning money.

Greed is something that always keeps a person interested. These trading platforms raise a per person for money by supplementing them with several offers. This has turned the trading industry into a gambling industry which ultimately ends with luck.

This trading approach becomes gambling as it leads to crucial losses, which, in the end, lowers the economic rate.

The reality of day trading

Many traders go bankrupt or in debt while trading, but there is a silver lining to only 1% of traders receiving better returns than the investment in funds with low expense ratios.

Though amateur day traders would be on cloud nine when they incur huge profits, they start believing they are amongst the family of the silver lining (the 1% traders). But reality hits their faces when the markets go in the opposite direction of theirs.

Highs and lows of stocks

Stock investment may seem an excellent choice for investing money for the distant future, but one should only invest in them if one can bear the losses faced when the stock goes down. Day traders deal with positions daily, but this plan fails and can result in a recession, which can be dangerous.

There could be cases where you hear a stock price may strike up and you invest in it, but instead of going up, it keeps on falling down each day until its value reaches zero.

 This again takes us back to the question that had arisen earlier.

Is day trading bad for the economy?

No, day trading is not bad for the economy because the increase in liquidity on the market is beneficial on a daily basis. On the contrary, day trading increases competition, lowers world prices, and indirectly helps consumers by raising the purchasing power of their income.

On the one hand, day trading does bring a rise to the country’s economy. It balances the prices in the market and also allows equity capital in trades. Day trading also benefits the local economies as well as the international markets.

Day trading can result in an individual going under serious debt if not appropriately practiced and can turn out risky for amateur traders. However, this can also lead to a decline in the country’s economy as there remains a great extent of indebtedness.

One can assert that this is a long-term problem because the success ratio is only 1%.

Day trading is an immensely debatable topic, but when done correctly with proper knowledge and awareness, it reduces the risk of debt for the traders and the economy.

Final words

If done correctly, day trading can benefit the trader and the economy, but they rally in the underlying risk of debts.

Day trading balances the demand and supply in the markets. It also increases the liquidity of the assets for the users.

Like every trading approach, this, too, helps only those who know the market and are ready to put in hard work and remain consistent with it. Unfortunately, however, even a tiny mistake can hurt the trader as well as the economy.

Trading is not a game of guesses; as a trader, you need to make informed decisions that give you excellent returns on your funds. Hence, technical traders make use of different chart patterns and tools to indulge in profitable trading sessions. One of these patterns is also called the Wedge Pattern.

Wedges are prominent in all trading communities and are trusted by the masses of traders too. Additionally, these wedges provide answers without much hassle as they are easy to read and interpret. However, a rookie must learn and understand about it to comprehend the Wedge Pattern. Wedge Pattern sustains for 10-50 trading periods and is frequently visible on any asset’s price chart. The eccentric quality of this chart is that the highs and lows of price coincide at a point to form a triangular shape. The wedges are classified into two types- The Rising Wedge and the Falling Wedge.

In the trading market, this chart pattern indicates the probability of reversals that are imminent in the direction of price action. Hence, equipping traders with the knowledge to modify their trading strategies and plans according to the situation. This Wedge Pattern can also hint towards the sustenance of a trend. To use the Wedge Patterns to their full potential, keep reading on to find how they work, how you can identify them, and use them with other strategies.

Classification of wedges

Wedge Patterns are of two types, and traders should comprehend how to spot each. These types are:

• The Rising Wedges are also called The Rising Wedge Pattern.
• The Falling Wedges are also called the Falling Wedge Pattern.

When compared based on principles, both these types have the same working pattern, with some minor variations. These types also have the same structure and shape and include three key features that make it easier to recognize them. These characteristics are:

1. Both these wedges comprise the upper and lower trendline that are bound to collide over time.
2. When these wedges form, the volume is bound to decline when prices move across the pattern.
3. In both types, the finishing point of the pattern is determined by the breakout that happens towards the trendline with a high slope.

After understanding these key components, it is now time to discuss the differences between both types of wedge patterns in more depth.

What is the Rising Wedge pattern?

The rising wedge pattern represents a bearish continuation pattern that is formed after the rising correction. In a bullish trend, price bounces between two slopings begin wide at the bottom and contract as prices move higher. After the rising correction, the continuation patterns follow the major downtrend.

As the name suggests, a Rising Wedge pattern means the trendline is going upwards and converging at that moment. 

In the Rising Wedge pattern, the upper line of the trend that is responsible for determining the hikes in prices rises at a slow speed compared to the lower line of the direction with time.  During this pattern creation period, the price of the asset will increase. However, the momentum will decrease inevitably. The decrease in momentum shows a probability of a reversal in the market, and prices are prone to going down. Hence, the bearish reversal is represented by this pattern.

At certain times, you can also spot a Rising Wedge pattern that also makes a sighting on the price chart of an asset if there has been a powerful downtrend. If this situation occurs, there can still be a breakout towards the bearish market. Hence, a Rising Wedge is also considered as a Bearish continuation chart pattern or bearish reversal.

In conclusion, a bearish reversal or bearish continuation chart is sighted on the asset’s price chart after a high momentum has prevailed. Two coinciding trend lines determine it. These lines are known as the Upper trend line and lower trend line. Moreover, for the Rising Wedge, the momentum and slope of the upper line are less than the lower trendline.

What is a falling wedge pattern?

The falling wedge pattern represents a bullish continuation pattern that is formed after downtrend correction. In a downtrend, price bounces between two downward slopings begin wide at the top and contract as prices move lower. After the downtrend correction, the continuation patterns follow the major rising trend.

The Falling Wedge pattern means that both the lines of the price chart converge when they are going downwards. When this pattern forms, the line representing the series related to security prices lowers over a fixed period, and the descent is slow compared to the upper trend line. This pattern is dominant after a downtrend in the market, which is also a sign of bullish reversal. However, one of the similarities between Rising Wedges and Falling Wedges is that they can also form after an uptrend on rare occasions. Hence, it is also considered as a bullish continuation chart pattern. 

In conclusion, a Falling Wedge pattern is also called the bullish continuation chart pattern or the bullish reversal, represented by the colliding upper trendline and lower trendline. Such lines are formed by connecting consecutive price high and price low points on the price chart when the Falling Wedge pattern, both the slope and momentum of the lower line are lower than the upper line of the trend.

How to recognize the rising and falling wedge patterns?

Both types of wedge patterns are some of the most accessible patterns to recognize. However, if you are an amateur in the trading market, it will take some time to breathe in the various elements of these patterns and understand them fluently. However, if you are an active trader, this should not take long because these patterns share some features with other chart patterns like the Pennants and Triangles. 

You can utilize the following two methods to understand and recognize the wedge patterns effectively. 

1. I am using geometry and shape recognition to identify rising and Falling Wedge patterns.
2. I am using technical indicators and tools to find rising and Falling Wedge patterns. 

To get the best out of your trading technique, you should use both the methods above in coordination with each other. Let’s move on to discuss the various techniques on how you can identify the wedge patterns. 

With the use of geometry and shape recognition

Several structural elements define both types of wedge patterns. If you comprehend these elements, you can quickly determine the wedges appearing on the price chart of an asset.  

Here are some of those structural components that will come in handy:

• Upper trendline.
• Lower trendline.
• Breakout.
• Convergence.
• Slower trading volume.
• Preceding trend. 

Let’s discuss these components in brief now.

Upper trendline

This upper trendline is created with consecutive price high points that prevail over the period.

• If there is a Falling Wedge, the upper trendline will have a higher slope. Moreover, when this line forms, there will be a price breakout through this trendline.
• On the other hand, if there is a Rising Wedge, the upper trendline will display a slope lower than the lower trendline. If the price keeps moving and passes the trendline, it indicates an invalid or Falling Wedge pattern.

Lower trendline

This lower trendline is created from consecutive price low points depicted over some time. 

• The Falling Wedge pattern has a trendline that comprises a lower slope than the upper line of trend. Further, if the price falls below this line, it indicates a Falling Wedge pattern.
• The Rising Wedge pattern contains a high slope as compared to the upper trendline. When this trendline that the price breakouts after the completion of the pattern. 

Breakout

This is the point where the price reversal is imminent, and it has already been set in motion. 

• If you recognize a breakout above the upper trendline, it is a Falling Wedge.
• If the breakout is below the trendline, it is a Rising Wedge.

During a breakout, the market will go back to the previous stage before the pattern was formed.

Convergence

When the wedge pattern is forming, the upper and lower trendline tend to dwindle or contract towards each other. As time passes, the trendline will start moving in the same direction at different speeds. The result is that these trendlines do not develop a parallel pattern; instead, they move in a colliding trajectory when this pattern develops. 

• If the lower line of trend moves at a rapid pace and has a high slope compared to the upper trendline, it is a Rising Wedge.
• The upper trendline comprises a higher slope than the lower trendline and moves at a rapid pace; it is a Falling Wedge.

Slower trading volume

When the trendlines intersect each other, it is inevitable for the volume to decline. This spikes the chances of the breakout in cases of both Falling Wedge or Rising Wedge patterns. 

Preceding trend

A prevailing price trend always precedes the wedge pattern. This trend is recognized through the high volume in which the securities are traded. 

This trend is generally bullish when there is a Rising Wedge in the market. However, the Falling Wedge is characterized by a downtrend or bearish trend. Furthermore, it would help if you always kept in mind that there should always be strong momentum and a price change in the market for a wedge.

Using technical tools and indicators

Since wedges have various components, they are comparably easy to understand and interpret. However, if you want to do this part ultra-quick, we suggest you use the technical tools and techniques the trading market is brimming with.

Keep reading below to find some essential indicators and concepts present in the technical trading world, and these can help define a wedge pattern.

Japanese Candlesticks

The candlestick patterns representing an opening, closing, high, and low prices are beneficial in identifying the wedge pattern. The trader can use these to find the uptrend and downtrend over a specific period. If you learn to identify the highs and lows, you can quickly draw the upper and lower trendline, which is a crucial part of identifying the wedge pattern.

Therefore, Japanese Candlesticks can simplify your process of recognizing the wedge pattern.

VPT or Volume price trend indicator

We have already discussed how the price will fall after the trendlines intersect, and there is a spike in price when the breakout happens again. Because of this point, the volume indicator can be utilized to measure the trading volume altercations and can also be used as a point for determining the wedge patterns on the price chart.

You can also use other volume tools and even volume itself to find the wedge patterns.

However, VPT is the most befitting choice to achieve this goal. This tool also defines the changes in price about the volume and direction of the price change. Hence, you will acquire both the direction and volume of the modifications, which is crucial for finding the wedge patterns. 

Elucidating the wedge patterns

 Wedges leave a surprising effect on the market. They are often the source of ambiguous signals to the traders who are unaware of their use and identification. Hence, to be confident in all your trading decisions, you must understand the substantial factors in the market and facilitate wedge pattern formation.

For the same reason, moving forward, we will understand the emotions that run the market and the creation of wedges in brief. So, next time, you can recognize all patterns with ease.

Understanding Rising Wedge

The Rising Wedge is the creation of 3 psychology stages in the broad market. These are:

Stage 1: The prevailing trend stage

When this pattern forms in the market, it is said that the market is in a specific trend. As mentioned before, if there is a Rising Wedge in the price chart, there will be a bullish trend that prevails in the market. Rarely, it can also be bearish as the prevalent trend.

We also discussed that whenever there is a Rising Wedge in the market, it is usually a result of high trading volumes. Based on the bullish and bearish trends, the high volumes indicate the existence of the buyer’s selling or purchasing interest for specific assets during that stage. 

Stage 2: The intersection or convergence phase

In this phase, as the trend moves forward, traders start getting suspicious of the prevalent sentiment, that is, bullish or bearish sentiment in the downtrend. 

Hence, a bulk of traders start to close down their positions with the intent of gaining profits or avoiding losses of their funds. Furthermore, there is also a halt to more trading activities in this stage. In case of an uptrend, short-sellers come towards the market to sell in this phase. 

The conclusion to this reverse sentiment in this stage. The upper trendline and lower trendline intersect, giving birth to the convergence stage and reducing the trading volume. 

Stage 3: The breakout stage

The stage where the traders run from the market to protect profits and seize losses is prevalent until the market reaches the point of saturation. As a result, the buyers are pressured to buy the securities, further pushing them into an overbought situation.

During this phase, the market cannot endure excess buyers, and a bearish breakout is triggered. This marks the formation of the Rising Wedge. 

Understanding the Falling Wedge pattern

At the base, the forces behind the development of falling and Rising Wedge are the same but opposite to those responsible for the Rising Wedge formation. Therefore, you must comprehend the Falling Wedge after the Falling Wedge, which is relatively easy.

The three market psychology phases that aid in the development of the Falling Wedge is as follows:

Stage 1: The prevalent trend

Like Rising Wedges, the Falling Wedge is also created from the first stage through the prevalent trends. In the case of the Falling Wedge, the general trends are primarily bearish, and in certain rare cases, it can also be bullish.

During this formation phase, the market is lively with activity, which hints that there is strong buying and selling intent amongst the traders for the asset.

Stage 2: The convergence stage

When the lines converge in the Falling Wedge when there is an activity in the market, the sentiment around any asset, the market sentiment starts to turn opposite, compared to the prevailing trend. Hence, the short-sellers begin exiting the market in bulk, and the buying interest hikes in the market for a particular security.

As a result of this transformation of market sentiment, there is a sharp fall in the trading volume. When the buying sentiments are nurtured, the upper and lower trendline start coming to the point of an intersection, where the speed of the upper trend line is faster. 

Stage 3: The breakout stage

During this stage, a stack of bullish traders start entering the market and hike the pressure on short-sellers of the asset to the extreme. This process will sustain until the market gets saturated and is oversold, and then a bullish breakout comes in. In conclusion, the onset of a bullish breakout is the indication of a Falling Wedge.

How to enhance the reliability of the rising and Falling Wedge patterns in the market?

There is always a set of limitations that govern any technical trading tool or technique. As we discussed before, wedges have several standard features with other chart patterns and tools. Hence, they may seem complex, but the concepts are clear once you understand them in depth. 

Furthermore, the reliability of falling and Rising Wedge patterns can be enhanced if used with complementary tools and signals. Here is a list of some of those auxiliaries that you can use along with the wedges.

• Japanese candlesticks patterns
• Moving averages, divergence indicators, and momentum
• Fibonacci retracement and extension levels

Moving forward, we will discuss the tools mentioned above in brief so you can combine them with the Wedge in your trading strategy.

Japanese candlestick pattern

The Japanese candlestick pattern can prove very useful in supporting the finding of the Wedge patterns. This is because they are easy to recognize and interpret and easier to combine with the current trading strategy. Hence, these candlestick patterns are a good aid for the Wedges.

There are three ways to integrate the Japanese Candlestick Patterns with the Wedges and enhance the reliability of the results. 

• Accurate pattern recognition
• Identify potential reversal zones
• Confirm breakouts

Here is a brief description of the working of each way. 

Accurate pattern recognition

To recognize the trend of Rising and Falling Wedge Patterns, you must pinpoint the consecutive lows and highs to create pattern trendlines. These Japanese Candlesticks patterns efficiently help read about any trading session’s opening, closing, lows, and highs.

Hence, as compared to several price charts, Pinning down the upper and lower trend lines becomes more accessible, and using Wedges also becomes a more straightforward process through the candlestick pattern.

Identify potential reversal zones.

Wedges are a popular technical analysis tool.  They are profuse in giving a general idea of the probability of reversal in the market; however, if you want to pinpoint the accurate reversal zone, you need to combine the complementary tools. That is where the Japanese Candlesticks pattern comes in handy and helps to improve your trade entries. 

Confirming breakouts

The best way to use Wedges for trading is to combine their power with the breakout trades. However, just like any other chart, you will also encounter false breakout signals at times. Hence, when doing breakout trading, Wedges can primarily give you a confirmation signal as a complementary tool. Continuation candlestick pattern is also a good tool that you can leverage for trading purposes.

Moving average, divergence indicators, and momentum

The indicators based on moving average and momentum are the ideal solution for the chart patterns, including Wedges. These indicators work significantly for the enhancement of the signals and determining the direction of trends. Therefore, understanding these tools is essential for using Wedge patterns.

Momentum indicators can enhance the reliability of the Wedges pattern in the following two ways:

• Pattern confirmation.
• Determining breakout strength.

Moving forward, we will discuss the use of the moving average, momentum, and divergence indicators through good examples.

Pattern confirmation

The eccentric feature of Wedges is that the trading activity declines, and there is also a decline in the momentum in the phase of intersection. Hence, identifying the Wedge on your price chart for the security and the momentum indicator can help.  These readings can be used to define the Wedge pattern. For the same reason, you can leverage the momentum readings directly or trace the Divergence through the price chart. 

Defining the strength of a breakout

Wedges and Breakout trading go hand in hand. However, not every breakout is similar. There is also the existence of breakouts that can greatly overturn the price trajectory and also have the power to derive massive profits for the traders. However, there is also the presence of breakouts in the market that fade down after moving the price by a negligible percentage.

Hence, not every breakout invites the traders to bet on it. However, the momentum reading about the price and moving average can help determine if the current breakout will benefit the Wedge trading pattern.

Examples: Momentum, divergence indicators, moving average

After discussing the basics of moving average and momentum indicators in the Wedge strategy, now is the time to use the following momentum indicators for the aforementioned purposes.

Now we will discuss the Stochastic indicator and the MACD (Moving average convergence divergence).

MACD or Moving Average Convergence Divergence

MACD falls under the category of the Momentum indicator; this is pretty useful for defining the breakout’s direction that is bound to happen or has happened. Here is how you can confirm the signals for your trade by using this:

• Bullish trade confirmation: If there is a Falling Wedge and the short moving average of MACD is beyond the longer moving average of MACD, this is the confirmation for the bullish trade. 

• Bearish trade confirmation: When you trade for the Rising Wedge, the shorter moving average of MACD is below the average moving line of MACD and confirms the bearish trade.

• During each case, the direction of MACD also confirms Wedge’s pattern breakout.

Stochastic oscillator

The Stochastic Oscillator or Stochastic indicator line fluctuates between the levels of 0 and 100 and defines if a security is overbought or oversold. But, first, let’s understand how you can use this tool to enhance the reliability of the breakout trade when utilizing a Wedge Pattern. 

• When the Stochastic Indicator stands at 30 or below that mark: If this reading is in harmony with the Rising Wedge, this is a sign that the breakout will occur below the lower line of trend.  Moreover, this breakout may sustain, and hence, you should short-sell or sell when this breakout happens. 

• When the Stochastic Oscillator stands at 70 or more mark: If this reading is in harmony with the Falling Wedge, then it is a sign that the asset stands at an oversold position, and there will be a breakout onset and uptrend. In such a situation, you should buy the security. 

Fibonacci retracement and extension levels

When you accurately pinpoint a Rising or Falling Wedge, you can also find the direction on the price and the possibility of a breakout. A Rising Wedge hints towards a bearish trend, while a Falling Wedge hints towards a bullish trend.

This recognition of direction helps make sound financial decisions and helps create a profitable entry, along with finding the precise points where a breakout may occur. Moreover, defining the substance of a price trend after the breakout is another crucial point that helps in finding profitable trade avenues. However, you can easily overcome these things by amalgamating Wedge patterns with the Fibonacci Retracement and Extension tool in the trading strategy.

The Fibonacci Retracement and Extension Levels play a substantial role in making the Wedge patterns more reliable. The two roles that are played in the same are:

• Identifying beneficial trade entry points
• Identifying valid trade exit points

Identifying valuable trade entry points

Fibonacci Retracement and Extension Levels can help determine where the swings in the Wedge Pattern will tune down. With these levels, you can have the upper hand in the trading market as you can define potential reversal trading points. 

Identifying beneficial trade exit points

Fibonacci Retracement and Extension Levels are significant to find the areas on the security price chart where the price wave will sustain and persist after the breakout takes place. Hence, such levels are beneficial in providing insights about the take profit points for your trading strategy.

Trading in Rising and Falling Wedges

Finding the Rising and Falling Wedges is not a very frightening task if you ask us. However, we can not vouch that it is easy to trade them in the market. Hence, it always works out in your favor when you have some great trading strategies hidden up your sleeve for these Wedge patterns.

The following section will discuss the many prominent strategies that make it easier to trade for Rising and Falling Wedge.

Wedge Pattern Breakout

This trading strategy comprises buying or selling decisions once the price comes out of the Wedge Pattern. For example, when you trade-in Falling Wedge, the breakout will trigger an uptrend while a downtrend for Rising Wedge Pattern will be.

Furthermore, there are four steps that you can use in a trading breakout to reach your goals:

• Identifying tradable waves.
• Determination of trade entry.
• Determination of the stop loss level 
• Determination of the take profit level

Here is the brief of every step that is mentioned above.

Identifying tradable waves

When you rely on a Breakout strategy for trade, the tradable price line will come after completing Pattern construction.

• When there is a Rising Wedge, you will ride the bearish price wave that comes after the price goes out of the lower trend line in the Wedge pattern.
• In the case of Falling Wedge, you will ride the bullish wave that comes after the price comes out of the upper trendline of the wedge pattern.

Establishing trade entry 

Here is what you should keep in mind to enter the market using the Breakout Strategy.

• The component of the Wedge pattern should be finished: You should be fluent in creating trendlines and the price chart and find out the intersection point before trading for these patterns.
• Avoid trading if the breakout has still not been identified: You should wait for the green light breakout signal before you indulge in a trade, or you may make a move on a false breakout sign. 

Once this is done, you should adhere to the following pointers to secure your win even further. 

• Take the extended position for the Falling Wedge to grab profits with price increase: Meaning you should purchase the security when you get the green light for a breakout and wait out the period for when the price increases and then exit the trade. You can use the Candlestick tool to confirm this signal.

• Sell short of making profits as the price decreases: Meaning you should sell the asset or sell short when you are sure that there is a breakout confirmation and then buy it again at a fallen price. You can use the Candlestick pattern here, too, to confirm the Rising Wedge breakout trades.

Establishing stop loss level

Here are the guidelines which you should utilize to establish the stop loss targets:

• Falling Wedge: In this case, put your stop loss target below the previous swing of low price for Wedge.  If the price goes on to swing below this fixed point, it will infer that your trade is invalid. In such scenarios,  you need to exit the trade to avoid further losses.
• Rising Wedge: Your stop loss point should be beyond the last high price swing when you trade in the Rising Wedge pattern. This step is similar to the Falling Wedge trading. However, in this case, also your trade can get invalidated, and you can absorb substantial losses. Hence, putting the stop loss point here will safeguard you from massive losses. 

Establishing take profit level

You can read the points below to find out what you should consider while putting a take profit level on trading when the Breakout trading strategy for the Wedge pattern:

• Falling Wedge: You should take a conservative approach here. Hence, set the take profit target, which symbolizes the initial creation of the Falling Wedge pattern and upper trendline. This target depicts that the market will come out strong once again after the breakout.
• Rising Wedge: In a Rising Wedge, you should keep your take profit point where the initial creation of the Rising Wedge and upper trendline occurs. You have the same hope here that the market will come back up after the breakout.

If you take a more aggressive stance in the market, these guidelines will also come across as conservative for you. Hence, for trading at aggressive levels, use the Fibonacci Extension levels.

 Additional things to remember.

1. To determine the existence of a reversal or continuation pattern, you need to assess the direction of the price trend. 
2. It is a sign of a continuation pattern if the Falling Wedge starts forming amidst an uptrend. Also, if there is a breakout below the lower trendline, it is a false sign or superficial. The market will go back up again gradually. 
3. If there is a Rising Wedge amidst a downtrend, it is also a sign of a continuation pattern. On the other hand, if there is a breakout, it is mostly superficial, and there will always be an uptrend after. 
4. Just like a reversal, a continuation also consolidates for both the Falling and Rising Wedges.

Pros and Cons of Falling and Rising Wedge

Like any other technical analysis, there are also bound to be advantages and disadvantages of the Wedge patterns. 

Pros of Wedge Patterns

1. Experienced traders can identify Wedge patterns with ease.
2. You will encounter limited subjectivity for trade entry, stop loss, or other limit points.
3. Wedge patterns give you several moves if you miss an opportunity, so you can still make profits.
4. Wedges are prominent on the security charts of several financial markets. Hence, you will have a plethora of trading windows that can break in profits. 

Cons of Wedge Patterns

There are several cons that you should keep in mind while trading Wedges, The most important limitations are as follows:

1. Beginners may find it complex to comprehend the patterns due to their structural resemblance with other patterns like Pennants and Triangles.
2. You need to combine the additional tools and techniques with the Wedge patterns to boost the reliability factor.
3. Wedges can also hint about reversal or continuation patterns, but these findings are not always on point. 
4. They can be mistaken for different chart structures in the market.

Conclusion

In conclusion, Wedge Patterns are commended mostly for their efficacy in finding out about the reversal and continuation signs. This is done through the intersecting upper trendline and lower trendline for the last trend until the market reaches saturation point, and then a breakout is inevitable. After that, wedges mostly lean towards reversal signs, but there are also continuation signals from time to time.

The Wedges have two types: Rising and Falling Wedges. These types help the trader acquire fast signals for the inbound uptrend or downtrend through which they can reap the profits. However, one should not solely focus on the patterns; combine the signals with complementary tools like Candlesticks pattern for trading in Wedges.