Stochastic - Classical Description

Discussion in 'Stochastic' started by Profiforex, Nov 19, 2010.

  1. Profiforex

    Profiforex Administrator Staff Member

    One of the widely used indicators. It is the most helpful indicator if it is used as a psychological assistant.

    In its calculation Stochastics takes into account not only closing prices, but also the lowest and the highest prices for the defined time period. That means that they contain much more information, than any other oscillator does.

    This indicator was elaborated by George S. Lane in the 50s, and its calculation looks like that:
    [​IMG] , where
    K - Lane Stochastic oscillator,
    С - the last closing price,
    L - the lowest level in n periods,
    H - the highest level in n periods.

    Afterwards they began to smooth Stochastic twice. At first by the average length of %К (fast Stochastic), and after that by %D (slow Stochastic) - this is the three period moving average of %К. These strange titles occurred when traders elaborated formulas for oscillators, sequentially giving them titles %А, %В, %С, etc. Only three of them turned out to be functioning: %К, %D and %R. The first two lines are known as Lane Stochastics, while the last is named after Larry Williams (do not mix up with Bill Williams).

    Trading on the crossing of %К and %D can be used only as the entry confirmation.

    As any other oscillator, Stochastic can be interpreted on the history basis in any way (it doesn't matter whether it was trend history or flat). That's why we have to be very careful.


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