The Stochastic indicator is a popular indicator used to predict stock trends, or overbought/ oversold states. The Stochastics indicator is similar to the ROC (Rate of Change) indicator and also has the negative features that ROC has as well. Because both indicators rely only on one data from historical charts, then it may be prone to instability and noise.
The Stochastics indicator is calculated by subtracting the today close price of the stock by its n- day Low value and subtracting the n- day High value of the stock from the n- day low value and dividing the two, i.e. forming the ratio, or rate of change/ momentum of the stock. The value is then converted to percentage by multiplying with 100. N is the number of days in the past.
There are 2 more values to the Stochastic indicator, it is the 3-day moving average of the above value which is called SK and again the 3 day moving average of SK forms the SD value.
Signals of change of position in stocks are complicated with this indicator because the trader needs to see both convergence, or divergence of the stock price with the Stochastic indicator as well as when SK crosses SD and also when the signals are given when the Stochastic indicator is at the 10%-15% range, or the 85% to 90% range.
Actually from backtesting results this indicator proved to be lossy, i.e. it lost the invested capital rather than preserving it, or increasing it. Even when all rules above were tested still the indicator did not provide any good results.
Another practical rule of Stochastics is that SD to be above 80% for a sale and below 20% for purchasing the stock. Even these rules though provided consistent losses.
Many people who studied Stochastics mentioned that its validity in predicting stock changes in price, may be overstated, i.e. this is not a useful indicator. Therefore, it may be better that traders who may use it to be careful, or that they not use it at all.
The Stochastics indicator is calculated by subtracting the today close price of the stock by its n- day Low value and subtracting the n- day High value of the stock from the n- day low value and dividing the two, i.e. forming the ratio, or rate of change/ momentum of the stock. The value is then converted to percentage by multiplying with 100. N is the number of days in the past.
There are 2 more values to the Stochastic indicator, it is the 3-day moving average of the above value which is called SK and again the 3 day moving average of SK forms the SD value.
Signals of change of position in stocks are complicated with this indicator because the trader needs to see both convergence, or divergence of the stock price with the Stochastic indicator as well as when SK crosses SD and also when the signals are given when the Stochastic indicator is at the 10%-15% range, or the 85% to 90% range.
Actually from backtesting results this indicator proved to be lossy, i.e. it lost the invested capital rather than preserving it, or increasing it. Even when all rules above were tested still the indicator did not provide any good results.
Another practical rule of Stochastics is that SD to be above 80% for a sale and below 20% for purchasing the stock. Even these rules though provided consistent losses.
Many people who studied Stochastics mentioned that its validity in predicting stock changes in price, may be overstated, i.e. this is not a useful indicator. Therefore, it may be better that traders who may use it to be careful, or that they not use it at all.
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