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Stochastics |
August 24 , 2005
16:32 @Ensign_Kimball: Hello, and welcome to the Ensign Training Class.
16:33 @Ensign_Kimball: Today we will be discussing the 'Stochastic' study. Please hold your questions until the end of the class. We will also be showing how Study Parameters work, and how to customize them to your liking. I will start today by displaying an IBM Daily chart.
16:34 @Ensign_Kimball: As you know, to apply a study to a chart, you click the 'Studies' button. Then select from the list of Studies in the Study list. I will select the 'Stochastic' study selection
16:35 @Ensign_Kimball: By default, the Stochastic study will be applied in a sub-window
16:36 @Ensign_Kimball: There are 2 lines that are plotted. The value of the lines can be viewed by moving your mouse around the screen. The Study Panel (at the left edge of the chart) will update with the study values of each line. The study values are color coordinated, so that (in this example) the RED values correspond with the RED line, etc. Now..... what exactly is the Stochastic Study ?
16:37 @Ensign_Kimball: A brief explanation...
16:38 @Ensign_Kimball: The Stochastic study is supplied with a BARS parameter (example 9 bars) The study then determines the Highest High and Lowest Low price for the 9 bars. This gives you a PRICE RANGE. Next. The current Price is compared to this price range and a PERCENTAGE value is returned, based on where the Current Price is in the RANGE.
16:40 @Ensign_Kimball: For example....if the HIGH price were 200 and the LOW price of the range were 100 and the Current price were 150. Then the PERCENTAGE would be 50%. The Current price would be exactly in the middle of the Range. If the current price happened to be 200, then the PERCENTAGE would be 100% because the Current price would be equal to the HIGHEST price in the 9 bar range. If the current price were 100, then the PERCENTAGE would be 0 % because the Current price would equal the LOW of the 9 bar range.
16:42 @Ensign_Kimball: This PERCENTAGE value has a couple names. 1) The RAW Stochastic, and 2) The FAST Percent K (or %K for short)
16:43 @Ensign_Kimball: So, if someone tells you that the FAST %K is equal to 100, you would know that the Current price in the market is on the HIGH of the specified BAR range. If the FAST %K is equal to 25 then you would know that the Current price is at 25% of the High Low Range. Since the Current PRICE level is converted into a PERCENTAGE it is easy to relate to.
16:44 @Ensign_Kimball: If you click on one of the Stochastic LINES on the IBM chart, the PROPERTIES window for the study will open.
16:45 @Ensign_Kimball: You can also press CTRL-O and then select 'Stochastic' from the Study list to view the Properties window. Or, click the 'Chart Objects' button. Lots of ways to get to the Properties window
16:46 @Ensign_Kimball: In the top left corner of the Properties window is the 'Bars' parameter16:47 @Ensign_Kimball: This is where you specify the 'Bars' range. If I change the 'Bars' number to 14, then the study will calculate the HIGH LOW range for the last 14 bars, instead of 9 bars.
16:48 @Ensign_Kimball: Most Traders do not like to use the FAST %K value (or RAW Stochastic value). It generally moves to quickly. A more common practice is to AVERAGE the Raw Stochastic to smooth it out.
16:49 @Ensign_Kimball: On the Properties window (top left) there are 2 additional parameter values which allow you to SMOOTH the Stochastic lines. There is actually a DOUBLE smoothing taking place.
The %K parameter is used to AVERAGE the Raw Stochastic. This will then calculate a SLOW %K value. The %D parameter is used to smooth the SLOW %K value (and return a %D value) These are the two plotted lines on the Chart
16:50 @Ensign_Kimball: In summary - A Raw Stochastic is calculated (based on the RANGE for the BARS parameter) Then that value is smoothed Twice. The 1st average is the %K line. The 2nd averaging returns the %D line
16:52 @Ensign_Kimball: You can hold down the mouse button in the sub-window and drag UPWARD to expand the sub-window. You can see in the screen capture above the 2 Stochastic lines. The light Blue line is the %K and the Red line is the %D
16:53 @Ensign_Kimball: Ok. Now What are we supposed to do with these Lines. What do they Mean ?????
16:54 @Ensign_Kimball: In general, when the value of the Stochastic lines get above the 80 level, they are telling you that the market has rallied up. Watch for the 2 lines to CROSS.....to give you a hint that the market may be changing directions. This is a sign that the market may be slightly OVERBOUGHT, and is due for a Correction downward
16:55 @Ensign_Kimball: If the Stochastics gets down below the 20 level, then the markets have moved down. Watch for the 2 lines to CROSS back to the upside. This may be a sign that you are about to correct back up.
16:56 @Ensign_Kimball: Seems like a simple idea. However, the Stochastic Study is simply an Indicator. Which means......it reflects what the Market is doing. Very Often....the market will rally. The Stochastic will rise above the 80 level. Then the market will Correct down. The lines will Cross to the downside.
16:58 @Ensign_Kimball: Sounds like a good trading system. And....sometimes...it works like a Charm. Usually, however, Stochastics is used in conjunction with other things...to validate a change in direction. If you relied on Stochastics alone......it won't always give you perfect results. However, they are pretty good by themselves.
17:00 @Ensign_Kimball: I have invited Buffy to make a few comments regarding Stochastics As this is one Study which she uses in her Trading
17:01 buffy: This is a chart of ours for the day. The first and second study window are all stoch. Fat - the spread between k and d in the first window - is good and says trend is strong and should only be trading with it
17:02 buffy: in the bottom study window, we use simple stoch. This gives us the ability to "see" the indicators get "lost" - like in the 14:51 area. This is just "hold on tight" and give the trade room
17:03 buffy: the stoch can also show us the divergence at Hs and Ls
17:04 buffy: here is a higher tf
17:04 buffy: thanks Kimball as simple option is not used often
www.dacharts.org/archives/2Xbline/_explain.htm
17:05 buffy: there are the settings
17:05 @Ensign_Kimball: Looks like you have had to Explain this before....Thank You
17:06 @Ensign_Kimball: As you can see from these great Examples.
17:06 @Ensign_Kimball: The Stochastic study can be greatly customized in its display. Colors and FILL between the lines can communicate additional information to the trained eye
17:07 buffy: :-)
17:08 @Ensign_Kimball: You are all welcome to visit the 'B-Line' chat room during the day to watch Buffy in action as the trading day occurs. She is a most gracias Chat room host and very helpful.
17:09 buffy: thank you Kimball
17:10 @Ensign_Kimball: gracious and we owe her a lot of gracias too...
17:11 @Ensign_Kimball: In any event. I hope that some additional light has been shed on the Stochastic study. This study can be used as an indicator of OverBought and OverSold areas. This helps you to be prepared to Sell and Buy turns in the market.
17:12 @Ensign_Kimball: That is all for Todays Training Class.
17:12 buffy: thank you Kimball
17:12 @Ensign_Kimball: Any Questions regarding this study? Feel free to e-mail questions to me at Kimball@ensignsoftware.com
17:13 @Ensign_Kimball: Well....have a nice day. Good luck in your trading. Have to run now. Good-bye.
17:13 buffy: night