Petunjuk Pertama - Stokhastic

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What is a Stochastic Indicator and How Can I Use it?


Richard Meade

A Stochastic Indicator is a measure of price momentum. Otherwise known as Stochastic Oscillator, it was developed by George C Lane in the late 1950's. Based upon a predetermined high and low range, it will indicate a closing price after a consistent level of either high or low closing prices measured over a set number of periods.

A consistent high level near the top of the range creates an accumulation or momentum known as 'buying pressure' and a consistently low level near the bottom of the range creates a distribution or momentum known as 'selling pressure' The Stochastic Oscillator will indicate when a trend is about to turn and flags up a buy or sell signal to the trader.

This article tells you how a Stochastic Indicator is calculated and how it is used to help make successful trades.

The calculation is as follows:

100 X ratio (recent close - lowest low)/(highest high - lowest low) = %K, where the lowest low and highest high is taken over a specified period. The most common period is 14days with the highs and lows recorded for each of the 14 days and the recent close is the closing price on the 14th day. This in effect mathematically compares the latest closing price to previous prices over the number of periods being considered. Clearly, since this ration is a percentage figure, it will vary or 'oscillate' between 0 and 100 over a period of time and is represented by a %K line on your chart.

The signal line or %D line is simultaneously plotted alongside the %K line and is normally a 3 period moving average. It effectively smoothes out the oscillations making it easier to spot the turn in trend which is why it is called the signal line.
What I have just described above is in fact known more specifically as a Fast Stochastic Indicator. There is also a Slow Stochastic Indicator and a Full Stochastic Indicator which are similar but more advanced and beyond the scope of this particular article.

If you follow my articles on my by blog at http://forexinvestmentmarket.blogspot.com/

There is no need for you understand the mathematics here or to even make this calculation yourself because most trading software will do this for you and will be shown plotted on a chart provided by your system supplier or forex broker account.
However, unless you are using a robot to trade for you, it is necessary for you to know how to use the Stochastic Indicator to help with your forex trading decisions.

In very simple terms, if both the %K and %D lines are high relative to your horizontal 'sell' trigger line then it is a signal that the market is overbought and about to reverse. This is and indication to sell.

Conversely, if the lines are low relative to your 'buy' trigger line then it is a signal that the market is oversold and about to reverse. This is an indication to buy.

Of course the trigger lines are set to suit your own trading style, usually somewhere between 70 and 80 for the high and between 20 and 30 for the low.
Different traders interpret the Stochastic Indicator lines in different ways. For example when they intersect going up or coming down is often used as a trigger to buy or sell. Before making any real trading decisions based on Stochastic Indicators, as always you should paper trade to become familiar with then and the positioning of your horizontal trigger lines. In other words develop your own system.
Never ever use the Stochastic Indicator as your only guide to trading. You should always use a combination of indicators which all point in the same direction before you make a decision.

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Stochastic Indicator - the Ultimate Timing Indicator for Huge Gains!

Sacha Tarkovsky

While basic chart analysis will tell you the trend, the stochastic offers something more when used as a filter, it helps you time your trades with better accuracy and greater profits.

Its real value is that at significant chart points where you are looking for a top or bottom, it will help you enter or exit your trades for greater long term profits.

For long term trader's day traders or swing traders it's the ultimate timing filter, in currencies or any ther market.

An Introduction

George Lane, who developed the indicator, postulated that in an upwardly-trending market, prices tend to close near their high, and in a downwardly-trending market, prices tend to close near their low.

As an upward trend takes its course, prices tend to close further away from the high, and as a downward trend develops, price tends to close away from the low.

As a timing indicator

The theory of the stochastic is based upon these are the catalyists which indicate the beginning of a trend reversal.

The stochastic indicator defined:

1. Is a momentum oscillator that can warn of strength or weakness in the market, often well ahead of turning points.

2. Is based upon the assumption that when a financial instrument is rising it tends to closer to the high than when it is falling, where it tends to close near its lows.

How the indicator is plotted

The stochastic is plotted as two lines %K, a fast line and %D, a slow line.

The %K line is more sensitive than %D

The %D line is a moving average of %K.

The %D line triggers the trading signals.

Although this sounds very complicated, it is actually very similar to the way a moving average is plotted.

Think of %K as a fast moving average and %D as a slow moving average.

Don't worry

You don't need to know how an internal combustion engine works to drive a car and stochastics are the same.

Their plotted on most major chart services, take a look at futuresource.com as an example and there are many others.

All you need to do is look at the set up, all the maths is done for you

The lines are plotted on a 1 to 100-scale. "Trigger" lines are normally drawn on stochastics charts at the 80% and 20% levels.

A signal is generated when the lines cross. The zones above and below these two lines are referred to as stochastic bands.

Overbought and oversold levels

The 80% value is used as an overbought signal, and the 20% is used as an oversold signal.

The Stochastic Oscillator generates signals in three main ways:

1.Extreme values

When the 20% and 80% trigger lines are crossed.

Buy when the stochastic falls below 20% and then rises above that level.

Sell when the stochastic rises above 80% and then falls below that level.

The pattern of the stochastic is also important; when it stays below 40-50% for a period and then swings above, the market is then shifting from an overbought scenario and giving a buy signal and vice versa when it stays above 50-60% level for a period of time.

Stochastic Crossovers

Crossovers are very effective and work as follows.

Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. Beware of short-term crossovers that may generate false signals.

The preferred crossover is when the %K line intersects after the peak of the %D line ( known as aright-hand crossover).

Beware though, crossovers often provide choppy signals that need to be filtered with the use of other indicators.

Stochastic Divergences

Divergences between the stochastic and the underlying price trend also offer good signals to trade off.

For example, if prices are making a series of new highs and the stochastic is moving lower, you may have a warning sign of weakness in the market.

Caution

As with any technical indicator its does not work by itself, so make sure you have signals from the charts before adding the stochastic as a filter.

The ultimate trading filter

Used as a filter, it can warn of strength and weakness and get you into or out of the market, to maximize profits, or just as importantly help you minimize losses.

There is no better indicator for timing your trades than the stochastic.

George Lane Still Trading Off Stochastics at Age 75


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By Martin Chandra

George Lane completed his 47th year of trading in December 1996 and is still going strong. After many years of trading in the grain pits in downtown Chicago, Lane has shifted to screen trading during his "retirement" in a small community about 80 miles south of Chicago.

However, retirement means different things to different people, as Lane was up until 2 a.m. trading Italian bonds the night before he spoke with this reporter. Lane said, "I was having fun! ... it beats working for a living!"

Early in his life, Lane was set on becoming a physician-as his father had been. But, then "I was out roaming around Chicago one afternoon. I wandered into a building to buy a cigar and I heard a bunch of noise upstairs. I went up and saw these men standing around yelling," Lane said. "All of a sudden, I was hooked and medicine dropped from the picture," Lane said.

While initially Lane worked as a broker, he said "that didn't work out very well ... because as a broker you want to give customers advice that is in their best interests. Sometimes what you think goes against what the firm thinks."

In the late 1950s, Lane purchased a membership on the Chicago Open Board of Trade for $25 and started trading the grains. The Chicago Open Board of Trade, now known as the MidAmerica Commodity Exchange, was originally founded in 1868.

At first, Lane said, "I wasn't doing very well. An old timer came over to me one day after the dose and asked me how I was doing. Every night after trading, he and I went down to the local tavern and as long as I bought the whisky, he taught me everything he knew about the markets."

"He introduced me to the Taylor trading method, which is a three-day trading cycle" Lane explained. Lane began to pick up trading and started to see some success in the pit. He eventually became the president of the Investment Educators Inc. "I'd trade all day and then we'd meet at night," Lane said. In that capacity, he invented 64 "stochastics," a widely used momentum indicator.

"Stochastics measures the momentum of price," Lane explained. "If you visualize a rocket going up in the air- before it can turn down, it must slow down. Momentum always changes direction before price ... It is a very sophisticated tool," he said.

According to John J. Murphy's book Technical Analysis of the Futures Markets, stochastics "is based on the observation that as prices increase, closing prices tend to be closer to the upper end of the price range. Conversely, in down-trends, the closing price tends to be near the lower end of the range. Two lines are used in the Stochastic Process-the %K line and the %D line. The %D line is the more important one and is the one that provides the major signals."

"We had %A and %B-we went through the whole alphabet twice, working on things. Then we discovered %K and then %D and the darn thing worked. So, we quit the research and went into the pit every day and started making a living," Lane said. He calls himself a strictly technical trader. "I read the fundamentals, but the fundamentals are not the way to trade---the technical side is so much more lucrative."

But, "it is hard work if you are going to be a trader- you've got to be looking at your computer five to six hours a day," Lane said.

Currently, in his "retirement" Lane trades "about four to 12 times per day." His time frame is "45 minutes to 1 1/4 hours," with average gains of "$150, $350, $750" per trade. "They all add up at the end of the day."

"You can make $5,000 a day trading one-lots," Lane said. From his screen, Lane trades primarily off of three-minute, 15-minute and 30-minute charts, relying on "stochastics, volume and trendlines."

Recently, Lane has been trading the S&P 500 futures contract at the Chicago Mercantile Exchange. He sticks to liquid markets, avoiding thinly traded contracts such as pork belly futures or lumber.

Lane doesn't confine himself to U.S. markets, however, estimating that 20% of his trading extends to foreign futures markets. "German bonds and Italian bonds trade very actively," Lane noted.

However, Lane said he never trades without a stop-loss order protecting his position. "That's the secret to making money in commodities-control the size of your losses."

Lane recommends that beginning futures traders read "John Hill's three books on charting basics-if you are a good chartist-the charts talk to you."

"You can learn how to do it yourself," Lane said. "Brokers are salesman. Never take advice from a broker. Because, then you are admitting that you don't have enough smarts to make your own decisions." Asked what was a key factor in success in commodity trading, Lane replied "greed."

"Trading is fear and greed and if you have enough desire to have a successful financial life-you can do it," He concluded.