The stochastic oscillator measures the velocity of price movement and therefore is a MOMENTUM oscillator. Most indicators that traders use, such as moving averages, move after the price has moved. The stochastic oscillator is a LEADING INDICATOR, meaning that it always changes BEFORE price does.
Look at the first example below. The stochastic started to turn up 8 bars before price climbed a full 6 points. In the second example the stochastic turned down 11 bars before price turned down. Two beautiful examples of a leading indicator! EXAMPLE One
EXAMPLE Two
 George Lane made the stochastic oscillator popular and he told a funny story about how it came to be. Apparently, in the 1950's traders were so desperate for new indicators that they were willing to try anything. An engineer had come up with a formula for getting just the right amount of limestone in the mix to make steel. A trader looked at this and said "Well why not try it?" and it worked!
Most traders buy when the price goes up through the 20 line and sell when it hits the 80 line. The Edge does not use this commonly used methodology, but uses the stochastic in several unique ways…
CHART SET UP FOR STOCHASTICS On your one-minute and three-minute charts, and any others, put on a regular"Slow Stochastic," which should come with all charting packages. However, I useTradestation and these charts are created using this platform. The default inputs for the stochastic that come with your charting software will usually be something like this:  Change the Inputs as follows:  Then make %D blue or yellow or purple; do not make it green or red if your charts show candlesticks in green and red. When you have finished that, apply the indicator to the screen that you have your futures contract or stock or index in candlestick format. Take your mouse and left click on the stochastic %D and drag it up to the price bars. Voila! You should have the stochastic overlaid on the candlesticks. Most charting software is capable of doing this but if you have trouble with it call your service provider's technical support. Labels: THE STOCHASTIC OSCILLATOR
|
