Stochastics: An accurate buy and sell indicator
In the late 1950s, George Lane developed stochastics, an indicator that measures the relationship between an issue’s closing price and its price range over a predetermined period of time. Even today, stochastics are a preferred technical indicator because they are quite easy to understand and use.
Price action
The premise of stochastics is that when a stock is trending upwards, its closing price tends to trade at the upper end of the day’s range. For example, if a stock opened at $10, traded as low as $9.75 and as high as $10.75, and then closed at $10.50 for the day, the price action or range would be between $9.75 (the low of the day) and $10.75 (the high of the day). Conversely, if the price has a downward movement, the closing price tends to trade at or near the low range for the day’s trading session. Stochastics are used to show when a stock has moved to an overbought or oversold position. Fourteen is the mathematical number used most often in the time mode. Depending on the technician’s goal, it can represent days, weeks or months. The chartist may want to research an entire sector. For a long-term view of a sector, the chartist would start by looking at 14 months of the entire industry’s trading supply. The stochastic indicator is classified as an oscillator, a term used in technical analysis to describe a tool that creates bands around some mean level. The idea is that price action tends to be bound by the bands and revert to the mean over time.
Relative Strength Index (RSI)
An example of such an oscillator is the relative strength index (RSI) – a popular momentum indicator used in technical analysis – which has a range of 0 to 100. It is usually set to either the range of 20 to 80 or the range of 30 to 70. Whether you’re looking at a sector or an individual issue, using stochastics and the RSI in conjunction with each other can be very beneficial.
Formula
The stochasticity is measured by the K-line and the D-line. But it is the D-line that we follow closely, because it will indicate some major signals in the chart. Mathematically, the K-line looks like this: %K=100×CP-L14/H14-L14 where: CP=Last closing price L14=Lowest price of the 14 previous trading sessions H14=Highest price of the same 14 previous trading sessions The formula for the more important D line looks like this: D=100(H3L3)where:H3=Highest of the three previous trading sessionsL3=Lowest price traded in the same three-day periodD=100(L3H3)where:H3=Highest of the three previous trading sessionsL3=Lowest price traded in the same three-day period We show you these formulas only for the sake of interest. Today’s programs (such as Viking) do all the calculations, making the whole technical analysis process so much easier, and thus more exciting for the average investor. %K is sometimes called the fast stochastic indicator. The “slow” stochastic, or %D, is calculated as the 3-period moving average of %K.
Reading the chart
The K-line is faster than the D-line; the D-line is the slower of the two. The investor must watch when the D-line and the price of the issue start to change and move to either overbought (above the 80 line) or oversold (below the 20 line) positions. The investor must consider selling the stock when the indicator moves above the 80 levels. Conversely, the investor must consider buying an issue that is below the 20 line and starts moving upwards with increased volume. Over the years, many articles have explored the “tweaking” of this indicator. But new investors should concentrate on the basics of stochastics.
What are stochastics?
In technical analysis, stochastics refers to a group of oscillator indicators that point to buying or selling opportunities based on momentum. In statistics, the word stochastic refers to something that is subject to a probability distribution, such as a random variable. In trading, the use of this term is intended to indicate that the current price of a security can be related to a range of possible outcomes, or in relation to its price range over a given period of time.
How can I use stochastics in trade?
The stochastic indicator defines a range of values indexed between 0 and 100. A reading of 80+ indicates that a security is overbought and is a sell signal. Readings 20 or lower are considered oversold and indicate a buy.
What is a Stochastic Stock Chart?
Technical traders can add the stochastic oscillator on top of a security’s price chart, often displayed in a separate window below the price. There will usually be a horizontal line drawn at the index levels of 80 and 20 as well as at the mean (50). When the stochastic line falls below 20 or rises above 80, it produces a trading signal.
How to make Stochastic charts with Excel?
If you have data on the closing prices of a security, you can import it into Excel to calculate %K. In particular, you would subtract the highest high observed during your look-back period from the last closing price and put this into the numerator of a fraction. In the denominator, you would take the difference between the highest high and lowest low prices over the same period. Then multiply by 100. Stochastics is a favorite technical indicator because of the accuracy of its results. It is easily perceived both by seasoned veterans and new technicians, and it tends to help all investors make good entry and exit decisions on their holdings.
About the Vikingen
With Vikingen’s signals, you have a good chance of finding the winners and selling in time. There are many securities. With Vikingen’s autopilots or tables, you can sort out the most interesting ETFs, stocks, options, warrants, funds, and so on. Vikingen is one of Sweden’s oldest equity research programs.
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