STOCHASTIC (Stochastic)

STOCHASTIC (Stochastic) is one of three very popular and widely used Stochastic oscillators that were developed by George C. Lane in the late 1950s. Besides STOCHASTIC, the group includes SFK (Stochastic Fast) and SSD (Stochastic Slow). STOCHASTIC is the most customizable oscillator of the three. Besides, in its calculation, STOCHASTIC (as well as SSD) uses an additional smoothing technique as compared to SFK.

According to George C. Lane, STOCHASTIC is a momentum oscillator that doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price. Hence, it can be added that Stochastic oscillators help to foresee possible trend reversals, too.

A Stochastic oscillator consists of two sets of values:

The oscillator is calculated automatically in accordance with certain mathematical formulas (they are provided later in the article). As a result, values of both lines in the range from 0 through 100 are obtained for each period. On a chart, the STOCHASTIC oscillator is drawn in the form of two lines moving up and down parallel to each other within this range (0 - 100). From time to time, they cross over certain fixed levels and each other. The levels serve determining whether an instrument is overbought or oversold. The lines' crisscrossing can be a trading signal (read later in the article).

A Stochastic oscillator is always drawn in an additional area below the market price chart.

On the following picture, you can see an example of the STOCHASTIC oscillator (with all its important level lines) drawn in an additional area below the market price chart.



Please remember that the oscillator uses the historical data for its calculation, and all the information it provides belongs to the past. Indicators do not predict the market price future behavior. A trader can only suppose that the past tendencies will continue to develop in the same way for some time in the future and try to use this supposition appropriately.

As a momentum oscillator, STOCHASTIC suits both ranging and trending markets, provided the trend takes on a zigzag format.

In calculation of the signal %D line, the oscillator employs an additional smoothing technique resulting in its noticeable lagging behind the %K line.

The STOCHASTIC oscillator works well in company with a bar chart and other indicators, especially trend-following ones.

To apply a STOCHASTIC oscillator to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see the Add Indicator article.

During the procedure, a trader can customize the oscillator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.

The parameters fall into three groups:

The STOCHASTIC oscillator has several Calculation parameters:

The parameters are available on the Parameters tab of the STOCHASTIC Properties dialog box under the Calculation heading.

The STOCHASTIC oscillator has several Levels' parameters:

On the following picture, you can see how oscillators of different Levels' parameters (with level lines of different Overbought level and Oversold level values, widths, styles, and colors) look like on a chart.



The parameters are available on the Parameters tab of the STOCHASTIC Properties dialog box under the Levels heading.

When a STOCHASTIC oscillator is drawn on a chart, a trader can analyze its information and try to interpret it correctly. STOCHASTIC produces several trading signals:

The STOCHASTIC oscillator's values are calculated automatically using the following formulas:

Smoothing type for %K is MVA or EMA

%Ki = K-period MA of 100 x (Closei - LowestN) / (HighestN - LowestN)

where:
%Ki - is the oscillator's %K line value of the period being calculated.
K-period - is the number of periods (specified by the Number of periods for %K parameter), over which MA is calculated.
MA - is the MVA or EMA indicator (specified by the Smoothing type for %K parameter).
N - is the number of periods, over which the %K line value is calculated (specified by the %D slowing periods parameter).
Closei - is the closing price value of the period being calculated.
LowestN - is the lowest value of the N-period time frame.
HighestN - is the highest value of the N-period time frame.

Smoothing type for %K is Fast Smoothed

%Ki = 100 x Sum of (Closei - LowestN) / Sum of (HighestN - LowestN)

where:
Sum of (Closei - LowestN = (Closei - Lowesti) + (Closei-1 - Lowesti-1) + ... + (Closei-N+1 - Lowesti-N+1) Sum of (HighestN - LowestN) = (Highesti - Lowesti) + (Highesti-1 - Lowesti-1) + ... + (Highesti-N+1 - Lowesti-N+1)

where:
%Ki - is the oscillator's %K line value of the period being calculated.
N - is the number of periods, over which the %K line value is calculated (specified by the %D slowing periods parameter).
Closei - is the closing price value of the period being calculated.
LowestN - is the lowest value of the N-period time frame.
HighestN - is the highest value of the N-period time frame.

%Di = D-period MA of %Ki

where:
%Di - is the oscillator's signal %D line value of the period being calculated.
D-period - is the number of periods (specified by the Number of periods for %D parameter), over which MA is calculated.
MA - is the MVA or EMA indicator (specified by the Smoothing type for %D parameter).
%Ki - is the oscillator's %K line value of the period being calculated.

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