Stochastic Oscillator

Stochastic Oscillator is a dynamic indicator, or indicator of price change of speed, developed by George Lane. Calculated, it is very simple:

K = [(C-L) / (H-L)] * 100

Where:
K = Stochastic Oscillator
C = latest closing price
L = the lowest price for period n
H = the highest price for the period n

Additionally, in the manner Lane requires that the K was offset twice using 3-periodnoy moving average. Consequently, then, two other computations:

SK = 3-periodnaya Simple Moving Average of K
SD = 3-periodnaya Simple Moving Average of SK

* For details see a previous issues of the journal

Classical interpretation of Stochastics can be somewhat complicated. The basic method is to buy when the SK is higher than SD, and sell when the SK moves below the SD. However, the Stochastic Oscillator uses a calculation for a specified period, which makes his movement may be somewhat precarious, as the earliest date of data out of calculation, the later date. Because of this volatility and the emergence of false signals, the use of a stochastic oscillator for signal input and output can lead to a large number of unprofitable transactions. To compensate for this shortcoming, buy signals are more reliable when the intersection occurs in the range of 10-15%, and sales - in the range of 85-90%.

Unfortunately, many methods use a stochastic oscillators can lead to consistent losses over time. Some analysts recommend that flatten the data further, or seek confirmation of the relationship perekuplennosti / pereprodannosti to sell or buy. Most of the secondary filter type indicators perekuplennosti / pereprodannosti work Stochastics worsen due to the fact that is not fully used by the main trend, as there are fast Facing at the entrance and exit.

Tech Trade, based on the K39
The study, published in the Encyclopedia of Technical Market Indicators "shows that some very good signals were presented nesglazhennym 39-periodnym Stochastic oscillators (K = 39, no signal line). Purchase tone served when K crosses from bottom to top 50% level and the closing price is the closing vyshemaksimalnogo the previous week. Alert sale is filed, when the K line crosses down the 50% level and the closing price is below the minimum closing of the previous week. Taking a longer period, and no smoothing with a 3-periodnoy moving average, the analyst can see the Stochastic oscillator.

Please note: You can apply the Stochastic Oscillator in graphics programs, choosing the indicator "Slow Stochastic" with parameters 39 and 1.

The graph below for MSFT, we see that the 39-periodny Stochastics crosses up the 50% level on 14 June, at a cost of approximately $ 72.00.
39-periodny Stochastics can be effectively used on a weekly, daily and hourly schedules. Using weekly data for three years, we see that the 39-week Stochastics for MSFT does not cross the bottom 50% level until the end of February 2000.

Quick-turn, which occurred at MSFT for the next month, shows the need for confirmation of signals. If we look at the daily schedule CSCO, we find that 39 days' Stochastics maintained above the 50% level since November 1999., When the price of $ 35 until early April 2000. When the price was $ 65 per share. Here again we see a false rally in late April.

What can be used to confirm?

Confirmation
As the Stochastic Oscillator is an indicator of price trends, it is necessary to combine it with the assessment of the volume to confirm the signal. The chart below, along with the indicator of the equilibrium volume (OBV), as the signal line was added to 30-day Moving Average.

Please note that byche was crossing the equilibrium volume at the beginning of November 1999. and again in early June 2000. shortly after Stochastics line moved back above the 50% level. Although Stochastics unfolded in April, the intersection of the equilibrium volume was not the case. When Stochastics line moved back above the 50% level in early June, shortly followed by a confirmation.

Always remember that all market-based instruments are unique and, while the 39-periodny Stochastic Oscillator is a useful technical indicator, it is necessary to bring it in line with your specific marketing tool. For example, the majority Technology shares showed a trend of the signal sign up at the intersection of Stochastics 40% level, and sales at the intersection of Stochastics down 60% level. However, for the mobile market-based instruments provide the best confirmation of the second or price-sensitive indicator, along with an indicator of volume.

Scott McCormick
stockcharts.com