How to Not Be Worried About Drops in the Stock Market

As we discussed in Part 1 of this series, by now you should have a determined trends for the stocks you are watching. Now we will start to examine the waves of its price action. Regardless of whether the trend of a stock is going up or down, it will always move in waves. It will always swing up and down on a short term basis. And it is this back and forth motion that will help us hone in on when is the most advantageous time to make our move.Course, while it is good practice, you should not rely totally on your eyes when it comes to nailing down what the price wave is precisely doing at on given time.

It should be quantified by using an indicator. This is where a good oscillator comes in handy. Oscillators measure the swing motions that all stocks exhibit. They are generally placed at the bottom of your price chart and have a little chart of their own that depicts the back and forth price motion.By viewing the chart of the oscillator, you will get an idea of when to consider jumping into a stock position. The stochastic is one very popular oscillator that actually has two different lines on its chart.

Stock Market Trading Systems

These are known as the fast and slow stochastic lines. It bases its signal on price action over a certain number of trading days known as periods. You will have to enter the period you wish to use.Most traders use a period of 14 and follow the slow stochastic line.When the slow line falls below 20, the stock is considered to be oversold and represents potential buying opportunity. When slow line rises above 80, it indicates an overbought situation and you should be looking to sell.Here is a word of caution when using the stochastic line.

If you want to add a degree of safety, you wait for the line to turn back up or down before buying or selling. In other words, do not buy because the slow line fell below 20. Instead, wait for it to turn back up or even to cross above 20 again before buying. The reason for this is that these lines can move sideways for prolonged periods of time.