Stochastic Indicator Technical Indicator


The Stochastic Indicator was developed by George Lane in the early 1960's.It is based on the observation that as the price of an instrument increases,the daily closes tend to be closer to the upper end of the recent pricerange. Conversely, as the price decreases, the daily closes tend to becloser to the lower end of the recent price range.

There are three primary stochastic values:

1. Raw stochastic - the most basic value representing the stochastic value for each period. Also known as raw K.
2. %k - the first smoothing of the raw stochastic, usually with a 3-period exponential moving average.
3. %d - the smoothing of the %k value, usually with another 3-period exponential moving average. Also known as slow K.

There are two parameters for stochastics:

1. The number of periods over which the raw stochastic is calculated (14). The Slow Stochastic is a chart of the %k and the %d values. To calculate the stochastics:

Assuming parameters of 14,3 find the 14-period high, the 14-period low andthe latest price.

The raw stochastic is calculated as (latest - 14-period low) / (14-periodhigh - 14-period low) multiplied by 100. Therefore if the 14-period high was200, the 14-period low was 100, and latest price is 150(150-100)/(200-100)*100 = 50%

On the third period of data, the %k is the average of the raw values. Afterthe 3rd period %k is the 3-period exponentially smoothed raw values (2/3 old%k + 1/3 new raw stochastic).

After 3 periods of %k, the %d is calculated as a 3-period exponentially smoothed version of %k.

Below is a video explaining stochastics

Stochastics Bullish Divergence

Here is a chart that has made a new price low on a stochastic bullish divergence.

Stochastic bullish divergences will almost always happens at market bottoms.

Chart showing a bullish divergence on the Stochastic Oscillator


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