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Stochastic - Fast Indicator
Description:
Stochastic is an oscillator that indicates overbought and
oversold conditions in the market. It is based on the
premise that during periods of price decreases, bar closes
tend to accumulate near the low of the bar and during
periods of price increases, bar closes tend to accumulate
near the high of the bar.
Conventional Analysis:
A signal is generated when any plot lines cross.
Additional Analysis:
Some traders prefer the slow stochastic which is smoothed
by means of a moving average technique, instead of the
fast stochastic which is not smoothed. The fast
stochastic, like the slow stochastic, plots two lines: %K
and %D. The area above 75 or 80 is usually said to be
overbought, while the area below 20 is usually said to be
oversold. The developer, Dr. Lane, believes the most
important signal is a divergence between %D and the
commodity; that is, the condition when %D makes a series
of lower highs while the commodity makes a series of
higher highs. This
signals an overbought market. An oversold market occurs
when the commodity makes a series of lower lows while %D
makes a series of higher lows.
When either of these patterns occur, you should anticipate
a signal. You can initiate a position when the %K crosses
the %D from the right-hand side (when the %D has either
bottomed or topped and is moving higher or lower when the
%K crosses the %D line). Dr. Lane believes that the most
reliable trades occur when the %D is between 10 and 15 for
a buy, and between 85 and 90 for a sell.
Additional References:
Lane, Dr. George C. "Lane's Stochastics." Technical
Analysis of Stocks and Commodities magazine. May/June,
1984.
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Technical Analysis Studies Available
You can adjust parameters of each indicator
to suit you.
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