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What Stochastic Should be Telling You by kensey

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	Metromedia Fiber Network Inc A (MFNX)	This stock hasn't really traded very long, so its indicators don't have much track record. Nevertheless, stochastic pointed out an excellent buying point for this stock in early February. The more you study stochastic, the more it should be starting to lead you through the following thought process: MACD is important in telling us which way a stock is trending. It tells us whether to buy or sell. But MACD doesn't tell us precisely when to pull the trigger and act on the information. Stochastic tells us that you never have to worry about a market running away from you, so don't rush when buying a stock. Stochastic tells us that it pays to have patience and wait for both MACD and stochastic to be issuing bullish signals before you jump the gun.
	So what happened to MFNX's trading activity in late March/early April? As you can see on the stochastic graph, it formed a pail. This formation is called a pail because it resembles the bottom of a bucket. This was not a buying opportunity. Not just in hindsight, clearly at the time: prices at this point had cut way below the 13-day EMA and the MACD lines were nose-diving. When this happens, you have to be much more careful in your use of stochastic. Since stochastic is such a short-term indicator, it can sometimes be misleading. This is why we stress that it should only be used in conjunction with MACD. If MACD is totally breaking down, there is a lot more risk in going long. The dive below the lower reference line in late April doesn't appear to have been a clear-cut opportunity either, although it happens that this trade would have worked. But the action in the MACD lines is not very definitive. Look at the shape of the lines in early February, then look at all the rest of them. Only the clearest of formations are reliable signals. When stochastic lines start flapping around, they become more ambiguous. Next: Deriving Stochastic

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