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Trade School: Understanding Stochastics

Trade School: Understanding Stochastics. Nick Fosco July 12, 2010. Stochastic – The Father. Developer: George Lane Professional traders for 50+ yrs Floor Broker for 10 yrs BoD of Mid-America Commodity Exchange (1965) Wrote daily market letter/hot line for 16 yrs

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Trade School: Understanding Stochastics

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  1. Trade School: Understanding Stochastics Nick Fosco July 12, 2010

  2. Stochastic – The Father • Developer: George Lane • Professional traders for 50+ yrs • Floor Broker for 10 yrs • BoD of Mid-America Commodity Exchange (1965) • Wrote daily market letter/hot line for 16 yrs • Trained thousands of traders on technical analysis since 1953 • Passed in 2004 at age of 83 Source: Investopidia

  3. The Stochastic Oscillator • Is a technical momentum indicator • Compares security’s closing price over a period of time • Oscillator sensitivity is adjusted by changing the length of the time period. • Higher sensitivity = shorter time period • Higher sensitivity = less accuracy in buy/sell signals • Theory: Trending markets tend to close at top or bottom end of daily price range for the respective upward or downward trend.

  4. The Stochastic Formula %K = 100[(C - L14)/(H14 - L14)]C = the most recent closing price L14 = the low of the 14 previous trading sessions H14 = the highest price traded during the same 14-day period.%D = 3-period moving average of %K Alternative formula: (Slow Stochastic) %K = 100[(C - C14)/(H14 - L14)]

  5. Stochastic Rules • Works best as momentum ‘change’ indicator • Indicator result is a normalized ratio 0 to 100 • Overbought > 80 • Oversold < 20 • Buy: %K crosses %D after oversold condition • Sell: %K crosses %D after overbought condition • Best when used in conjunction with other supporting indicators such as: • On Balance Volume • Acceleration Bands • Relative Strength

  6. Examples Source: ThinkorSwim

  7. Let’s find some • Load up trading platform and look at some group suggested stocks.

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