Understanding The Stochastics Technical Indicator
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Stochastics is an important indicator for the technical analysis of a stock or a whole sector.
When you’re learning technical and analytical stock trading, you’ll need technical indicators to perform technical analysis and get a clear picture of a stock or an entire sector. You may come across a term called “stochastics”, a formula developed by George Lane.
The Slow Stochastics Indicator Formula Investopedia defines stochastics as an indicator measuring the relationship between the closing price of an issue and its price range over a range or period of time already determined. This is also something known as the “slow stochastic indicator”, a formula which serves as a price oscillator for comparing the closing price of a security over “n” range. Here’s the slow stochastic formula:
14 is the range most commonly used for the slow stochastic indicator, but you can replace the “n” with the specific range you are monitoring. If you wish to continue using 14, you must www.tradezero.co
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get the highest value and the lowest value over the past 14 trading bars. You can calculate the slow stochastic on any time frame. 14 can represent days or weeks, or even months. It isn’t always advisable to calculate slow stochastics with raw market data, unless you are an experienced chartist. Rather, you can use the indicator your trading platform provides you with.
What the Chartist Does with Stochastics The experienced chartist would wish to examine a whole sector. He/she could begin the analysis by checking out 14 months of the trading range of a whole industry. Trading range refers to the range between the high prices and low prices traded in a period of time. By analyzing the trading range, you can gauge the momentum of the stock. If a stock breaks through its trading range after some days of trading in it, it usually indicates a positive momentum, and if it sinks below its trading range it is usually an indication of negative momentum.
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Stochastics has an underlying principle that the closing price of a stock has a tendency to trade at the higher range of the price action for the day. In other words, the closing price of a particular stock usually trades at the higher of the prices for which it has traded all through the day. That’s what price action refers to. Here’s an example: If the stock opened at $10.00, had the lowest trading for the day at $9.75 and the highest trading at $10.75, closing the day at $10.50, the price action is between the day’s low, $9.75, and the day’s high, $10.75. In the case of a stock’s downtrend cycle, the closing prices usually close at or around the trading session’s low price point.
Relative Strength Index Expert analyst Jack Schwager also talks about “normalized” stochastic oscillators with predetermined high and low boundaries. The RSI (Relative Strength Index) is an example of an oscillator with a 0-100 range which is usually set at the 30-70 or the 20-80 range. Using the RSI and stochastics together can prove to be beneficial whether you’re examining an individual stock or an entire sector.
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The earlier mentioned formula needn’t be necessarily calculated manually since your charting software can handle it. That makes technical analysis a lot easier for even traders and investors without much experience. With stochastics, you can easily figure out if a stock is in an oversold or overbought position. It is accurate and easily perceptible.
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