Stochastic Oscillator

Overview

 

Stochastic (sto kas'tik) adj. 2. Math. Designating a process having an infinite progression of jointly distributed random variables. Webster's New World Dictionary

 

The Stochastic Oscillator compares where a security's price closed relative to its price range over a given time period.

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.

 

Support and Resistance

Think of security prices as the result of a head-to-head battle between a bull (the buyer) and a bear (the seller). The bulls push prices higher and the bears push prices lower. The direction prices actually move reveals who is winning the battle.

 

Support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower.

 

To use this formula most effectively, use the parameters dialogue to change the style to a dotted line while increasing the line weighting.

 

 

Ultimate Oscillator

 

"The trouble for most oscillator workers was, and has continued to be, that while frequently oscillatorslead sometimes they lead far too early and, instead of buying a bottom, you are buying falling daggers and getting sliced up. Even the best oscillators consistently give premature buy and sell signals. I believe my "Ultimate Oscillator" corrects this", stated by Larry Williams, in the Apr 85 issue of Technical Analysis of Stocks & Commodities.