Momentum based trading example
We apply the stochastic indicator in a non-traditional way to identify strong and weak underlying momentum in a stock. It is particularly useful when used with flag and ascending triangle patterns as well as for helping traders and investors monitoring longer term trending activity. It is discussed at length in my book, Simple Tactics, Profitable Trading.
In this instance, the LLC chart shows the current relationship between the rising trend and the stochastic indicator (see the Hand Symbol indicating the stochastic above 80 on the signal line). This is the sort of repetitive relationship which occurs routinely in the market and because of its routine nature, it gives us confidence that the relationship is not a fluke or a one-off situation, but something we can monitor and track and apply to our own profitable ends.
To contrast the bullish relationship between price and the stochastic, look at the chart below and note the relationship between the stochastic sitting below 80 on the signal line and the sell off in Lend Lease (LLC). We show this section of the chart in this example so you can clearly see that when a stock does not have underlying momentum, it's share price will go nowhere except down.