There are several major interpretations for stochastic, which may be more beneficial when combined with other indicators that discern whether a market is in a trending or cyclical rotation mode.

One interpretation (and the one Dr. Lane believes to be most important) is to look for a divergence between %D and the price. An overbought market occurs when %D makes a series of lower highs while the price makes a series of higher highs. An oversold market occurs when the price makes a series of lower lows while %D makes a series of higher lows.

A second interpretation is to receive signals based on a crossover of the two lines. When the %K line rises above the %D line it is considered bullish, and when the %K line falls below the %D line, it is considered bearish. You can eliminate some false signals by using only the signals which correspond to the direction of the intermediate to long term trends.

A third interpretation is that a buy signal is generated when either line dips below and then rises above 20, and a bearish signal is generated when either line rises above and then dips below 80.

Many investors combine several of these interpretations as a major criterion used for making trading decisions.