Stochastics Oscilators

- Stochastics is used to show power of bull and bear (growing stronger or weaker).
- Compare close price with its price range within specific period of time.
- In uptrend = price tends to close near their high. In downtrend = price tends to close near their low
- As uptrend mature = price tends to close further away their high. As downtrend mature = price
tends to close further away their low
- Clusters = Begining of trend reversal = stochastic attempt to determine when price start to clusters
around their low of the day in uptrend market, and cluster around their high in downtrend market
- Stochastic is plotted Value 0-100 with Formula
Raw Value = comparison last close price to 20 day low and 20 day high
%K = MA 3 of raw value
%D = MA 3 of %K
- %D line more important than %K line
- Stoch > 80 indicates strong and price is closing near its high
- Stoch < 20 indicates strong and price is closing near its low
- %K line change direction faster (K= q(k)uick). When %D line change direction after %K line, slow and
steady reversal Signal is often indicated
- When both line change direction, faster %K line change direction to retest a crossing od %D line,
though doesnt cross it=confirms the stability of prior reversal that happens before
- A powerful move is under way to happen when stoch reach extremes level 0 or 100. Following a
pullback in price, if indicator retest extremes, a good entry point is indicated
- Many times, when %K or %D line begin to flatten out, indicates trend will reverse during the next
trading range
- Period of D. Based on cycle of commodity being traded. First determine cycle of commodity, then
number of stoch bar = half the cycle period. Ex: 18 day cycle = 9 day stoch.
- Divergence. Price making higher high, stoch making lower low. Price making lower high, stoch
making higher high.
- Garbage Tops. In uptrending market, many congested top (double/triple top) can take several time
period to turn down and approach bottom trendline. When price finally turn down, they often
bottom quickly and turn back up again = "Spike Bottom"
- Extreme stoch level. When %K reach 100% price can still go higher. And when reach 0% price can
still go lower. It only indicates the strength of overbought-oversold condition
- Price can still move in its direction for extended period with oscilator remains at the top/bottom.
- Check the Weekly/Monthly Stoch. Stoch, as well as trend charting, should always look at bigger TF.
Longer term chart helps analyst to understand where the development is leading to.
- Stochastics must used in combination with conventional charting technique. Ex: if unviolated trend
is in force (no consolidation/reversal pattern forming), stochastics signal is false. If symetrical
triangle is forming, trend is violated/break pattern down, stoch signal can be used as confirmation.