Intro to Indicators

sawcruhteez (55)in #trading • 6 years ago

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Developed by George C Lane in the late 1950’s.
Momentum oscillator that fluctuates between 100 and 0
Shows the location of the close relative to high-low range over a set number of periods
According to Lane the Stochastic:

“follows the speed or the momentum of price. As a rule, momentum changes direction before price.”

This would create a bullish or bearish divergence which can be used to buy or sell. Stochastic was originally developed as a divergence indicator.

Divergences

A divergence occurs when an indicator moves in a different direction than the price.

stochastic divergence.png

Rule of Thumb

Overbought > 80
Oversold < 20

Calculation

%K = (Current Close - Lowest Low) / (Highest High - Lowest Low) x 100
%D = 3-day SMA of %K

%K default lookback period is 14 (if using daily chart then looks back 14 days. If using hourly chart then looks back 14 hours etc).

A 14-period %K would use the most recent close, the highest high and the lowest low over the last 14 periods.

Example Calculation on price of Bitcoin from 5-1-18 through 5-14-18:

Screen Shot 2018-05-27 at 1.55.21 PM.png

%K= ($8,700 - $8,412) / ($9,899 - $8,412) x 100
= (288/1,487) x 100
= .1936 x 100
= 19.36

%D = 3 day SMA of %K

%D = 17.84 + 19.16 + 19.36 / 3
%D = 56.36 / 3
%D = 18.78

Buy Signal

%K crosses %D below 20 in bull market

Screen Shot 2018-05-27 at 1.32.50 PM.png

Sell Signal

%D crosses %K above 80 in bear market

Screen Shot 2018-05-27 at 1.34.49 PM.png

Important!

In a bull market the sell signal does not indicate a short entry, but could be an indication of when to take profits.

Sources:

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillator_fast_slow_and_full
www.youtube.com/watch?v=V6n2GzGlDZM&t=197s
www.youtube.com/watch?v=-XxQUibI94Y

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