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Strategies & Market Trends : TA Science Projects & Experimental Indicators

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To: HeyRainier who wrote (136)	6/1/1998 11:02:00 PM
From: ftth	Read Replies (2) of 237

[stochastics] Some other quick thoughts on stochastics as overbought/oversold indicators: I think you hit on the crux of the problem with using Stochastics as OB/OS....it doesn't account for volume. All stochastics are telling us is where the current close happens to be within the short-term range of prices. Price movement to the extremes of this short-term range doesn't necessarily have to be accompanied by high volume, and since stochastics don't use volume, a price move to the extremes of this range really has no basis for being called overbought or oversold (but is). Short-term overpriced or underpriced (if you believe in the revert to the mean concept) would be a more accurate terminology. How can the state of being overbought (or oversold for that matter) possibly be quantified without using volume? Since the unit of buying is a share, seems including volume is the only way to quantify whether buying pressure is getting to the extremes of its normal range (i.e. overbought). On a more philosophical note, a stock can't be overbought or oversold. There's a finite amount of shares available. When those are all spoken for, there can be no more buying. Demand exhaustion is a better way to look at it. Everyone that wants to own at these prices has. And they're either holding and total interest in the stock dries up, or buyers and sellers are offsetting each other. This is why a stock can stay at "overbought levels" for long stretches (and often does, which is one of the Stoke's problems). There's still stock available (presumably), just no new buyers or lack of dominant sellers. Looking at the volume when price appears to stagnate can be very revealing. Guess it wasn't so quick. dh

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