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What is the Stochastic Indicator (1)

What is the Stochastic Indicator (1)

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Published by Foram Chheda

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Published by: Foram Chheda on Mar 02, 2012
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11/04/2013

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What is the Stochastic Indicator?
 
The Stochastic Indicator is a price oscillator consiting of two lines (Percent K and PercentD) which move either up or down with upward and downward movements in pricerespectively. The two lines oscillate between 0 (signifies the bottom) and 100 (signifiesthe top).
 
Why should I use the Stochastic Indicator?
 
The Stochastic Indicator depicts the tops and the bottoms of the market very well. Thus,this indicator can prove to be very usefull for positional and intraday trader.
 
How do i setup the Stochastic Indicator?
 
There are 2 main type of stochastics : Fast Stochastics and Slow Stochastics. I personallyprefer the Slow Stochastics because the indicator is smooth and gives a more accuratereading. You need to find out which system is the best for you.The general setup guideline for Slow Stochastics for Intraday Trading is :
Period (14),%K (3) and %D(3)
.
 
How do i use the Stochastic Indicator?
 There are many different ways in which you can use the stochastics. I will emphasise hereagain, that you need to develop your own system. These techniques might/might not workfor you.1. THE TRADITIONAL CROSSOVER : This is one of the most basic techniques used in alloscillators and moving averages. Whenver the Percent K and the Percet D cross eachother, you buy or sell accordingly. Please see Figure 1 below for further understanding.The main disadvantage of this technique is that it will give you many false signals andmany times after you enter a position the Buy/Sell signal will be given when a major partof your profit has been lost.2.THE 75 and 25 CROSSOVER : The higher and the lower limits of the stochastics is set at75 and 25 respectively. This technique is more successful than the tradional crossovertechnique mentioned above. Whenever the %K crosses the 75 Limit Line while goingdownwards, a Short Position (Sell) should be opened and whenever the %K crosses the 25Limit Line while going upwards, a Long Position (Buy) should be opened. This techniquegives good results on 5, 10 and 15 minute chart for intraday traders. Please refer toFigure 2 below for a better understanding.
 
Why did you not mention Overbought and Oversold conditions?
 The market might remain in an overbought or an oversold condition for relativelyextended periods of time. Therefore, I consider overbought and oversold conditionsirrelavant for a day trader (Personal Preferences).
 
 
Figure 1- stochastic traditional crossover
 
 
Stochastic 75/25 crossover

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