Stochastics

An indicator that measures the price velocity of a particular stock or market index. It essentially shows us where price is trading within a given range. The boundaries of the range would be the high and the low for a specific time period determined by the user. A stochastic of 100% would mean price is currently trading at the extreme high of the range and a stochastic of 0 would mean price is trading at the extreme low.

Stochastics, like the Relative Strength Index, helps us to determine whether price is overbought or oversold. When the Stochastics crosses up through the 80% line, it is considered overbought. Below 20% is considered oversold. The shorter the stochastic period, the more signals the indicator will produce. However, if your period setting is too short, the majority of your signals will be false. A moving average of the stochastic provides a basis for buy and sell signals. When an overbought stochastic turns down through its MA, a sell signal is produced. When an oversold stochastic moves up through its MA, a buy signal is produced.

Stochastics was developed by George C. Lane and is calculated as follows:

K = ((C - Ln)/(Hn - Ln)) * 100

Where

K is Lane's Stochastics

C is the latest closing price of the stock

L is the n-period low price of the stock

H is the n-period high price of the stock

n can be any number (Lane suggests 5 to 21)

Furthermore, Lane recommends that the stochastic line be smoothed twice with three-period simple moving averages: SK is the three-period simple moving average of K, and SD is the three-period simple moving average of SK.  In TC2000 you can make these settings whatever you like.

When plotting Stochastics in TC2000 three parameters are required:

Period - The number of bars used to calculate stochastics (n is the formula above)

SK Period - The factor by which stochastics will be smoothed.  A value of 5 would plot a 5 bar moving average of stochastics.

SD Period - The factor by which the SK line will be smoothed.  A value of 10 would plot a 10 bar moving average of the SK line.

When you look at stochastics plotted, the two lines you see are the SK line and the SD line.

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