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Stochastic indicator(s)

Moderators: mntiwana, mrtools

#1

Stochastic oscillator

From Wikipedia, the free encyclopedia

In technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane developed this indicator in the late 1950s.[1] The term stochastic refers to the point of a current price in relation to its price range over a period of time.[2] This method attempts to predict price turning points by comparing the closing price of a security to its price range.

The 5-period stochastic oscillator in a daily timeframe is defined as follows:

{\displaystyle \%K=(Price-L5)/(H5-L5)}
{\displaystyle \%D=100*((K1+K2+K3)/3)}

where H5 and L5 are the highest and lowest prices in the last 5 days respectively, while %D is the 3-day moving average of %K (the last 3 values of %K). Usually this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values. There is only one valid signal in working with %D alone — a divergence between %D and the analyzed security.[3]

Definition

The calculation above finds the range between an asset’s high and low price during a given period of time. The current security's price is then expressed as a percentage of this range with 0% indicating the bottom of the range and 100% indicating the upper limits of the range over the time period covered. The idea behind this indicator is that prices tend to close near the extremes of the recent range before turning points. The Stochastic oscillator is calculated:

Where
Price is the last closing price
LOW_N(Price) is the lowest price over the last N periods
HIGH_N(Price) is the highest price over the last N periods
\%D is a 3-period simple moving average of %K, SMA_3(\%K).
\%D-Slow is a 3-period simple moving average of %D, SMA_3(\%D).

A 3-line Stochastics will give an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow.[4] Typical values for N are 5, 9, or 14 periods. Smoothing the indicator over 3 periods is standard.

Dr. George Lane, a financial analyst, is one of the first to publish on the use of stochastic oscillators to forecast prices. According to Lane, the Stochastics indicator is to be used with cycles, Elliot Wave Theory and Fibonacci retracement for timing. In low margin, calendar futures spreads, one might use Wilders parabolic as a trailing stop after a stochastics entry. A centerpiece of his teaching is the divergence and convergence of trendlines drawn on stochastics, as diverging/converging to trendlines drawn on price cycles. Stochastics predicts tops and bottoms.

Interpretation

The signal to act is when there is a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom.[3] As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.

Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.[5]

Stochastic divergence

An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.[6]

Divergence-convergence is an indication that the momentum in the market is waning and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics, relative to price, forecasts a reversal in the price's direction.

An event known as "stochastic pop" occurs when prices break out and keep going. This is interpreted as a signal to increase the current position, or liquidate if the direction is against the current position.[7]



#3
I am a big fan of this indicator so I would sit at the front table in this section to learn and pay attention to what else will be explored from this indicator  [smile]

#4
This is a kind of correlation, divergence and stochastic indicator all in one
It shows the divergence of two symbols using stochastic as values and a criteria for divergence.

ds divergence.png 

Posting the original description here too :
_____________________________

This one is from the book a friend sent to me : "Evidence-Based Technical Analysis Applying the Scientific Method and Statistical Inference to Trading Signals" from David A Ronson.

_____________________________

In one place (starting from page 430 ) the author is mentioning the use of stochastic (he calls it a "Channel normalization operator" but from a definition of it it is clear that it is what we usually refer to as "Stochastic") to detect divergences of two symbols. The idea itself is simple and that is why I like it : 2 stochastics of a smoothed price are calculated for the current symbol and for the symbol that is used to comparison. Then the difference of those 2 stochastics is calculated. The a further enhancement is done by one additional stochastic applied to this difference in order to get clearer and more usable values.

rules_types.jpg  rules.jpg
Attachments
rules_types.jpg
rules_types.jpg (283.79 KiB) Viewed 6494 times
rules.jpg
rules.jpg (214.21 KiB) Viewed 6496 times
dual_stoch_-_divergences_2.1.mq4
(10.08 KiB) Downloaded 453 times


#6
Just a heads up - the link i clicked on was named "rsi indicators" and it led to this thread about stochastics - the stocastics link leads me here to the same page - easy thing to happen when moving the number of files you are working with - thanks for the super human effort.

#8
Double smoothed stochastic rsi (floating levels version)
Upgraded code (made more efficient) and some possible issues solved. In case of setting rsi period to <= 1 you are going to get "simple" double stochastic (so it belongs to this thread then). If the rsi period is > 1, then you get double stochastic of rsi

ds rsi.png
Attachments
ds rsi.png
ds rsi.png (112.88 KiB) Viewed 6291 times
Double Stochastic RSI fl.mq5
(11.23 KiB) Downloaded 437 times

#9
Hi mladen,
Is it possible to have this one for mq4 please ?
cheers

#10
[QUOTE=hannele]Hi mladen,
Is it possible to have this one for mq4 please ?
cheers[/QUOTE]

Hi Hannele, made this one. added 6 different rsi options ,Regular RSI,Slow RSI,Rapid RSI, Harris RSI,RSX and Cuttlers RSI. Also has options for coloring, color on slope, color on middle line cross and color on outer levels cross.

double stochastic rsi.png 
Attachments
Double Stochastic RSI.mq4
(17.15 KiB) Downloaded 691 times
double stochastic rsi.png
double stochastic rsi.png (50.39 KiB) Viewed 6256 times


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