Rule #1 Finance Blog

With Investor Phil Town

InvestED Ep. 166 – Technical Indicators: Stochastic Indicator

This week I joyously conclude our discussion of Technical Indicators. Danielle seems to find a way to get me to admit the pros of Technical Indicators, and I will let you in on why those pros aren’t enough for a Value Investor. We’ll be wrapping up with a discussion on the Stochastic indicator.

Disclaimer: These indicators DON’T work for everyone. They WILL burn you if they’re not used correctly so listen to this episode carefully. They MAY help if you’re stuck in a 401k or if you don’t have a long time before retirement.

In Episode 166 You’ll Learn:

  1. Technical Indicators
    • Technical Indicators are tools used by traders to predict market trends
    • Why are we talking about it?
      • Because a lot of people do use them to enter and exit the market, although most value investors including Buffett and Munger do not. It is good to know what other people are doing – which is why it’s useful.
      • Take this as general knowledge to add to your basic investment resources – it is something good to understand and be aware of.
      • Technical trading is buying a stock based on solely the stock – not any other factors.
      • Value investing takes the whole company (not just the stock) into account.
  2. Stochastic Indicator/Oscillator
    • What is the Stochastic Indicator?
      • The Stochastic Indicator is another momentum-based indicator similar to the MACD, however, this indicator tracks the overselling and overbuying of stocks
      • The Stochastic is particularly useful for small, independent traders while the market is up – this is not a great tool for those in the Rule #1 mindset
      • Overbought/oversold
        • Overbought refers to a stock that has been bought so much that it has reached a plateau. At this plateau, there are no more buyers
        • Oversold refers to a stock that has been sold so much there aren’t any more sellers
      • Pro: the stochastic is a good indicator because it doesn’t force you in and out
      • Con: for the stochastic to work you buy the index, and you aren’t buying single companies, as you would with Rule #1/Value Investing
      • Con: going in and out of the market regularly can result in so many fees you are actually losing, as opposed to gaining. This can be very detrimental if the market is quickly fluctuating in short bursts

Show Notes:

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On the InvestED podcast, Phil and his daughter Danielle shine a light on the successful investing strategies that gurus like Warren Buffett have used for 80 years. Listen in for a great stock market education on basics, learn how to invest on your own, and follow along with real-time examples and investing tips from week to week.