Stochastics
History
George Lane was the originator of the stochastics in the 1970's. Lane observed that as prices increase in an
up trend, closing prices tend to be closer to the upper end of bars and in a down trend closing prices tend
to be nearer the lower end of bars. Lane developed stochastics to discern the relationship between the
closing price and the high and low of a bar.
Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and
%D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are considered
overbought and readings below 20 are considered oversold.
| Stochastics can also be use to generate buy and sell signals. When the faster %K line crosses above the
slower %D line and the lines are below 20, a buy signal is generated. When the %K lines crosses below the %D
line and the lines are above 80 a sell signal is generated. |
|
My Own use Of Stochastics
Well as usual just to be contrary to everyone I don't use the stochastics to signal overbought or oversold
although I do take note of the readings. I like to use them as possible buy and sell opportunities after
defining a trend. If the trend is up as in the example below on the AUD (Australian Dollar) I like to only
take buy signals regardless of the reading as long as the trend remains in place. I ignore the sell signals.
I purposefully weaken the stochastics to give me more signals and I use 8,3,3 as my settings.
This gives more signals and shows the hand of the weaker players. The same is true of selling in a down
trend. I ignore the buy signals and only take the sell signals. I don't use stochastics on their own as
trading method as all the settings I have tried ultimately resulted in to many whipsaws. Experiment with
different settings and consider adding this indicator to your trading arsenal.
AUD/USD
Good Trading
Mark McRae
Information, charts or examples contained in this lesson are for illustration and educational purposes only.
It should not be considered as advice or a recommendation to buy or sell any security or financial
instrument. We do not and cannot offer investment advice. For further information please read our
disclaimer. |
