Of the several technical indicators used to indicate the relative overbought/oversold state of a market, I prefer the Stochastic Oscillator – although I use it in a rather unconventional manner. Before I tell you what I do with the Stochastic Oscillator let’s explore how the conventional oscillator is calculated and used.
The classic Stochastic Oscillator consists of two calculations – Percent K and Percent D.
The formula for the Stochastic Oscillator is as follows:
%K = Close – LL / HH – LL * 100
That is (close minus Lowest Low) divided by (Highest High minus Lowest Low).
Close is the current price.
Lowest Low is the lowest price for the past number of %K periods.
Highest High is the highest price for the past number of %K periods.
Stochastic Oscillator then displays the current price relative to the range of prices over the number of periods specified for %K – the number used in our example is 14
The range of the %K is from zero to 100. High values are overbought and low values are oversold. A value of 80 or greater is considered high and a value of 20 is considered low.
Obviously, a very high or very low, value over a very long number of periods, indicates the degree of overbought or oversold is extreme.
A smoothing factor is often used in percent K calculations. The calculation without additional smoothing is often called the fast Stochastic and the one with smoothing is often referred to as the slow Stochastic. Smoothing is using a short period average rather than the actual period figure.
Percent D, often referred to as the signal line, is a moving average of percent K and can be calculated in many different ways – with or without smoothing.
Figure 1 US Bond 6000 Ticks Per Bar, Fast Stochastic with 14 %K periods, smoothing factor of 1.
In the chart shown in Figure 1, percent K (the solid red line) is shown reversing its direction and crossing its signal line (percent D, the dotted yellow line). This is classically considered a buy or sell signal depending on whether the change in direction is up or down.
Note the potential trades market by the white vertical lines on the above chart. Each could have been a pretty good trade based solely on the Stochastic Oscillator.
However, look at all the other signals from the same indicator (whenever the red line crosses the dotted yellow line). Taking every one of these trades from the Stochastic Oscillator would have resulted in a small net loss – made even greater by the many sales commissions.
Nevertheless, I like the Stochastic Oscillator very much – it is my primary overbought/oversold indicator – but with a lot of modifications from the conventional usage.
What I seek is a way to get the few good signals – and eliminate the many mediocre signals and the few really bad signals.
My next post will cover our specific modifications to the Stochastic Oscillator- and how I use the indicator in my trading method.
Exchange rates table is provided by DailyForex.com - Forex Reviews and News
Live currency cross rates is provided by DailyForex.com - Forex Reviews and News
Live indices widget is provided by DailyForex.com - Forex Reviews and News
Live commodities widget is provided by DailyForex.com - Forex Reviews and News
Author & Trader
the SRV’s are spot on !!Tom CUSA
….very impressed with the whole philosophy – both personal and trading, expressed in the book. I will read and revert !!Richard DUSA
I trade the US Bond Markets exclusively – amazed at the accuracy of the SRV’s !!George SNew York, NY
Great system – couldn’t trade without it !!Frank YDavid, Panama
“The SRV’s are amazingly accurate”.Tony Texas
Thanks for the method !! Very solid, very logical entry and exit and genius SRV’s !!Denis DRussia
- January 2017 (1)
- December 2016 (3)
- September 2016 (2)
- August 2016 (2)
- July 2016 (2)
- June 2016 (5)
- May 2016 (1)
- April 2016 (2)
- March 2016 (1)
- February 2016 (3)
- January 2016 (3)
- December 2015 (1)
- November 2015 (3)
- October 2015 (5)
- September 2015 (5)
- August 2015 (2)
- July 2015 (5)
- May 2015 (1)
- April 2015 (1)
- March 2015 (1)
- January 2015 (1)
- November 2014 (1)
- October 2014 (1)
- August 2014 (1)
- July 2014 (6)
- June 2014 (3)
- May 2014 (5)
- April 2014 (2)
- March 2014 (2)
- February 2014 (2)
- January 2014 (10)
- December 2013 (11)
- November 2013 (20)
- October 2013 (13)
- September 2013 (14)
- August 2013 (10)
- July 2013 (26)
- June 2013 (16)