Dr. George C. Lane is the author of the stochastic indicator. His basic premise is as follows: During periods of price decreases, daily closes tend to accumulate near the extreme lows of the day. Periods of price increases tend to show closes accumulating near the extreme highs of the day. The stochastic study is an oscillator designed to indicate oversold and overbought market conditions.
Some technical analysts prefer the slow stochastic rather than the normal stochastic. The slow stochastic is simply the normal stochastic smoothed via a moving average technique.
The slow stochastic, like the normal stochastic study, generates two lines. They are %K and %D. The stochastic has overbought and oversold zones. Dr. Lane suggests using 80 as the overbought zone and 20 as the oversold zone. Other technicians prefer 75 and 25.
Dr. Lane also contends the most important signal is divergence between %D and the commodity. He explains divergence as the process where the stochastic %D line makes a series of lower highs while the commodity makes a series of higher highs. This signals an overbought market. An oversold market exhibits a series of lower lows while the %D makes a series of higher lows.
When one of the above patterns appear, you can anticipate a market signal. You initiate a market position when the %K crosses the %D from the right-hand side. A right-hand crossover is when the %D has bottomed or topped and is moving higher or lower and the %K crosses the %D line. According to Dr. Lane, your most reliable trades occur with divergence and when the %D is between 10 and 15 for a buy signal and between 85 and 90 for a sell signal.
Properties
%K: The number of periods in the chart. If the chart displays daily data, then %K Period denotes days; in weekly charts, the period stands for weeks, and so on. The application uses a default value of 14.
%D: The number of periods used in the Moving Average calculation. The application uses a default of 3.
SmoothingPeriod: The number of periods used in the Moving Average calculation for the Slow Stochastic study. The application uses a default of 3.
Interpretation
Dr. George C. Lane is the author of the Stochastic study. His basic premise is as follows: during periods of price decreases, daily closes tend to accumulate near the extreme lows of the day. Periods of price increases tend to show closes accumulating near the extreme highs of the day. The Stochastic study is an oscillator designed to indicate oversold and overbought market conditions.
The Stochastic study works similarly to the Relative Strength Index, although the Stochastic ranges between the values of 0% and 100%, and its overbought/oversold boundaries are wider, making this oscillator more volatile. The Stochastic also generates two lines instead of one.
The Stochastic study has overbought and oversold zones. Dr. Lane suggests using 80 as the overbought and 20 as the oversold zones. Some traders, however, prefer 75 and 25.
Dr. Lane also contends the most important signal is the divergence between %D and the contract. He explains divergence as the process where the Stochastic %D line makes a series of lower highs while the commodity makes a series of higher highs. This signals an overbought market. An oversold market exhibits a series of lower lows while the %D makes a series of higher lows. When one of these patterns appear, you can anticipate a market signal. Initiate a market position when the %K crosses the %D from the right-hand side. A right-hand crossover is when the %D bottoms or tops and moves higher or lower and the %K crosses the %D line. According to Dr. Lane, your most reliable trades occur with divergence and when the %D is between 10 and 15 for a buy signal and between 85 and 90 for a sell signal.
Literature
Lane, Dr. George C. Stochastics. Trading Strategies Futures Symposium International. 1984.
Lane, Dr. George C. Lane’s Stochastics. Technical Analysis of Stocks and Commodities magazine. pp 87-90. May/June, 1984.
Murphy, John J. Technical Analysis of the Futures Markets. New York Institute of Finance. Englewood Cliffs, NJ. 1986.
Murphy, John J. The Visual Investor. New York, NY: John Wiley & Sons, Inc. 1996.
Le Beau C., Lucas D. W. Computer Analysis of the Futures Market. 1992.
Kaufman, Perry J. The New Commodity Trading System and Methods. 1987.