1. Trade School: Understanding Stochastics
Nick Fosco
July 12, 2010

2. Stochastic – The Father
Developer: George Lane
Professional traders for 50+ yrs
Floor Broker for 10 yrs
BoD of Mid-America Commodity Exchange (1965)
Wrote daily market letter/hot line for 16 yrs
Trained thousands of traders on technical analysis since 1953
Passed in 2004 at age of 83
Source: Investopidia

3. The Stochastic Oscillator
Is a technical momentum indicator
Compares security’s closing price over a period of time
Oscillator sensitivity is adjusted by changing the length of the time period.
Higher sensitivity = shorter time period
Higher sensitivity = less accuracy in buy/sell signals
Theory: Trending markets tend to close at top or bottom end of daily price range for the respective upward or downward trend.

4. The Stochastic Formula
%K = 100[(C - L14)/(H14 - L14)] C = the most recent closing price L14 = the low of the 14 previous trading sessions H14 = the highest price traded during the same 14-day period. %D = 3-period moving average of %K Alternative formula: (Slow Stochastic) %K = 100[(C - C14)/(H14 - L14)]

5. Stochastic Rules Works best as momentum ‘change’ indicator
Indicator result is a normalized ratio 0 to 100
Overbought > 80
Oversold < 20
Buy: %K crosses %D after oversold condition
Sell: %K crosses %D after overbought condition
Best when used in conjunction with other supporting indicators such as:
On Balance Volume
Acceleration Bands
Relative Strength

6. Examples
Source: ThinkorSwim

7. Let’s find some
Load up trading platform and look at some group suggested stocks.