Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Stochastics -- Ignore unavailable to you. Want to Upgrade?

To: Wayners who wrote (425)	4/1/1998 9:55:00 PM
From: Wayners	Respond to of 927

<<Hi Wayne, I'm new to Stochastics and have been wondering, what is the significance when the %k and %D lines cross? What actually is a Stochastic and on TA charts you can pick any period for a Stoch so what is the relevance of it all? You know of any sites that could help a beginner like myself?>> Being an engineer, you should appreciate a lot of the following. The stochastic measures the relative position of the closing price within a given interval. The period is normally a daily one, but a Stochastic indicator can be constructed for any period as long as high, low and closing data are available. The term "stochastic" is actually a misnomer because it is a synonym for "random", which is not a concept that traders feel comfortable with. This indicator became extremely popular in the 1980s probably because it is simple, deliberate style appears to offer profitable and easy to follow signals. The Stochastic method rests on the assumption that prices tend to close near the upper part of the trading range during an uptrend and near the lower part during a downtrend. This range refers to the trading period under consideration. For example, daily data would have a trading range for a day, weekly data for a week and so forth. As the trend approaches a turning point, the price closes futher away from its extreme, (i.e. away from the daily high in a rising market when the closes are clustered nearer to the lows than to the highs, since this indicates that a trend reversal is at hand. For down markets the process is reversed. The indicator is plotted in the form of two lines, knowns as %D and %K. In a June 1984 article in "Technical Analysis of Stocks and Commodities" magazine, George Lane explains that he experimented with 28 different oscillators each using a different letter of the alphabet. It just happened that D and K turned out to be the best. The %K is the more sensitive of Lane's two oscillators, but it is the %D line that carries the greater weight and gives the major signals. The formula for %K is: %K=100(c-l)/(h-l) In this equation, c is today's close, l is the lowest low for the last n days and h is the highest high over the same n day trading period. For short term tading purposes, Lane recommends that n should be 3. A 5 period %K line has also become quite popular which is what I use. Since the timespan is longer using 5 days, the indicator is less volatile than the formula using the 3 period calculation. Of course other time periods may also be used. In the March 1991 edition of "Techncial Analysis of Stocks and Commodities" magazine, editor Thom Hartle uses a 14 day span and makes the point that some traders extend the period as far as 28 days. It is important to note that the Stochastic differs form other indicators because it uses the high and low for the trading period in question as well as the closing price. The %D line is a smoothed version of %K. The %D is calcuated as follows: %D=100(H/L) where in this case H is the n period sum of (c-l) in the %K calculation and L is the n period sum of (h-l)in the %K calculation. In a sense, you could equate the %D line with an n period smoothing or moving average of %K. The slow stochastic is a smoothed variation of the regular series. In this calculation the original %K line is eliminated and the old %D substituted. This renamed or slowed %K is then averaged by 3 days to form the %D slow. The resulting indicator is less volatile and subject to whipsaws. The process need not stop there, of course, since there is nothing to prevent the innovative trader from experimenting with other smoothings and time period comparisons. The stochastic indicator therefore takes the form of two oscillators. The %K is usually plotted as a solid line and its slower %D counterpart is expressed as a dashed or dotted line. I often have trouble remembering which line is which. A useful way to remember is to think of K as Kwick and D as Dawdling. When plotted, the stochastic oscillator always falls in the range of 0 to 100 like RSI. A reading near 80 is generally regarded as overbought and 20 as oversold. Crossovers of %K and %D indicate trading points within a trend. At bottoms, when the %K line crosses above the %D, it is often associated with rising prices, but greater so if the trend of the price is up. The opposite is true when the %K line crosses below the %D--assocated with falling prices, especially so in a downtrend on price. You should read a book on the subject such as Martin Pring on Market Momentum or do a search on the internet under stochastics. Look at the commentary about stochastics at the cbs charting site listed elsewhere on this thread. Hope this all helps and doesn't totally confuse everybody.