Stochastics

#1
I would like to learn about stochastics indicators in metastock. Please help me about the best possible combination of %k parametrs:- Time periods, slowing.
%D parameters:-Time periods, method.
Does the stochastics give good indications for trend? Which other indicators are good for analysing the trend?
Thanking you
gvnarendra
 

Traderji

Super Moderator
#2
Stochastic Oscillator

The Stochastic Oscillator was developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).

The Stochastic Oscillator is overbought / oversold indicator.

The stochastic indicator is:

A momentum oscillator that can warn of strength or weakness in the market, often well ahead of the final turning point.

Based on the assumption that when a stock is rising it tends to close near the high and when a stock is falling it tends to close near its lows.

Interpretation

The Stochastic Oscillator is displayed as two lines. The main line is called "%K." The second line, called "%D," is a moving average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.

There are several ways to interpret a Stochastic Oscillator.

Three popular methods include:

Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level.

Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

Look for divergences. For example, where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs.

Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A security can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20.

Buy and sell signals can also be given when %K crosses above or below %D. However, crossover signals are quite frequent and can result in a lot of whipsaws.

One of the most reliable signals is to wait for a divergence to develop from overbought or oversold levels. Once the oscillator reaches overbought levels, wait for a negative divergence to develop and then a cross below 80. This usually requires a double dip below 80 and the second dip results in the sell signal. For a buy signal, wait for a positive divergence to develop after the indicator moves below 20. This will usually require a trader to disregard the first break above 20. After the positive divergence forms, the second break above 20 confirms the divergence and a buy signal is given.

The recommended inputs for MetaStock are:

14,3,3 for long term turning points

5,3,3 for short term turning points,
 
C

CreditViolet

Guest
#3
gvnarendra said:
Does the stochastics give good indications for trend? Which other indicators are good for analysing the trend?
Momentum Indicators like stochastics are used in non trending periods like we have now.During trending periods it will give u many whipsaws.Also use them as trend filters not trend signals.

About periods I have found 18 gives good backtesting results
 
#4
Traderji said:
Stochastic Oscillator

The Stochastic Oscillator was developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).

The Stochastic Oscillator is overbought / oversold indicator.

The stochastic indicator is:

A momentum oscillator that can warn of strength or weakness in the market, often well ahead of the final turning point.

Thank you Traderji for the fine article about the stochastics.
gvnarendra
Based on the assumption that when a stock is rising it tends to close near the high and when a stock is falling it tends to close near its lows.

Interpretation

The Stochastic Oscillator is displayed as two lines. The main line is called "%K." The second line, called "%D," is a moving average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.

There are several ways to interpret a Stochastic Oscillator.

Three popular methods include:

Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level.

Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

Look for divergences. For example, where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs.

Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A security can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20.

Buy and sell signals can also be given when %K crosses above or below %D. However, crossover signals are quite frequent and can result in a lot of whipsaws.

One of the most reliable signals is to wait for a divergence to develop from overbought or oversold levels. Once the oscillator reaches overbought levels, wait for a negative divergence to develop and then a cross below 80. This usually requires a double dip below 80 and the second dip results in the sell signal. For a buy signal, wait for a positive divergence to develop after the indicator moves below 20. This will usually require a trader to disregard the first break above 20. After the positive divergence forms, the second break above 20 confirms the divergence and a buy signal is given.

The recommended inputs for MetaStock are:

14,3,3 for long term turning points

5,3,3 for short term turning points,
Thank you Traderji for the fine article about the stochastics
gvnarendra
 
#5
CreditViolet said:
Momentum Indicators like stochastics are used in non trending periods like we have now.During trending periods it will give u many whipsaws.Also use them as trend filters not trend signals.

About periods I have found 18 gives good backtesting results

Thank you creditviolet
gvnarendra
 

sh50

Active Member
#7
Your basic explanations are always very good, Traderji.. I recall reading MACD as well. Have you made any posts on ROC and RSI. If so, kindly let me know. If not, please do so as a fresh post. Thanks.
 

Traderji

Super Moderator
#8
sh50 said:
Your basic explanations are always very good, Traderji.. I recall reading MACD as well. Have you made any posts on ROC and RSI. If so, kindly let me know. If not, please do so as a fresh post. Thanks.
Sure, I will post them in the near future.
 
A

amarnath

Guest
#10
gvnarendra said:
Thank you creditviolet
gvnarendra

Is the value 18 is curve fitted value based on past movements or any random value BTW can i know how and why you feel value 18 works best beacuse market is not easy as it looks at left hand side :eek:
 

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