The theory behind the Stochastic Oscillator is based on the simple observation that as price increases in uptrending markets, closing prices tend to be closer to the upper end of the price range. In downward price movements, the closing price of the given security tends to be near the lower end of the range.
With that said, the Stochastic Oscillator is made up of two lines oscillating in the range from 0 to 100. The*%K*is the main line, and the function of its curve plots the ratio of differences between the current closing price and the lowest price within the specified "look back" period.
The second function plotted is the*%D*curve and it is simply the moving average of*%K*over a chosen period.
In essence, as a trader employing the Stochastic indicator, your job is to Locate the Buyers & Sellers & award the given trade analysis technical 'points' for the Stochastics “Crossover” at extreme levels of buyer or seller "Price Sentiment". The deeper the “Crossover” into Over Sold/Bought Territory, the better. The idea being that once the closing prices start closing near the extreme ranges calculated by the %D & %K functions, the market is due for a corrective action back to a theoretical level of price "Equilibrium".
The mental trading syntax I use during a trading session to objectify the process required to generate a 'Quantitative Technical Score' for any given trade would be as follows:
IF price reaches an extreme level of momentum and Over Sold/Bought Conditions before Crossing Over to indicate a change in the directional sentiment of the participants, THEN, I will award the Stochastic Crossover points needed to execute a trade in the direction Predicted by the Charts at that moment in time.*
As you can see however, this statement now opens you up to a whole other series of questions like:*
-Can I make a trade decision based off of a Stochastic Strategy alone?
-What percentage of the time does a Stochastic Crossover strategy actually produce winning results?
-How much Risk exposure must I be willing to accept when trading a Stochastic Crossover Strategy in order to feasibly turn a consistent profit?
None of these question can be easily answered in one single post. But what I can tell you is that the answer lies in Quantative Analysis, Probabilities, & Statistics.*
The path I personally took to find these answers led me to the development of a major spreadsheet, & tool that I use to mathematically define every component of my Trading Business. You see, I do not just quantify Stochastics. I study the entire Probability set for about 10 different technical indicators based on price action alone, that i have found could consistently turn a profit.*
I dont make a decision to enter a market when Stochastics alone signals an entry; I Execute a decision to Enter a market when a combined series of indicators signal an entry, and only when the probabilities & risk profiles that are automatically and mathematically calculated by my spreadsheet tell me that its "money making" time... you feel me?
anyways,verbalizing this information helps me tremendously because what i have learned is that when i can clearly explain what i am doing to others, it helps cement the knowledge & internalize the foundation of the information on a fundamentally deeper level. So what does that mean for you?
It means that if you want a copy of my spreadsheet, then all you have to do is go to my website at
Take Your Profits | TradeSocial: The Online Trading Business Network for Traders and fill in your email address in the indicated submission box & you will be granted access to download the file for your own personal use... FREE of charge. I seriously give it away free of charge. You'll see the button on the right hand side of the page, it says Free Spreadsheet.
For Traders: Forex Trading Systems – Stock Software & Free Spreadsheet
There is also a social network you can be a part of, and I invite you to join and share your experiences in grasping the knowledge and developing your skills as a trader using the technical indicators we are discussing.
Ill leave you with this, i trade the stochastic oscillator profitably, but I do not base my trading decisions off of the stochastic oscillator by itself & I do not suggest that you do either.
Just to give you an idea, the way I have used the Stochastic Oscillator this year, It has produced a 41.51% Winning Percentage which contributed to an 18% increase in my equity curve... but only because my trading psychology was centered on cutting the losers shorter and holding the winners longer.*
as you can see, this can become a long winded event, and a topic which will provide for a plethora of postings!!! i hope i did not bore you.
Good Luck!!! I really hope my answer helped you.
Log In
Sorry.
