Advanced Stochastic Indicators

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Advanced Stochastic Indicators

Advanced Stochastic Analysis, Can You Improve On A Good Thing?

Anyone who knows me knows that I am quite fond of the Stochastic Oscillator. It is a tool created by George C. Lane and seeks to make sense of the seemingly random movement of the market. In fact, the very name is a derivative of the Greek word stochos which means unknowable and random. The idea is that while the day to day, or shorter term, movements are random but over time that randomness will reveal an underlying pattern. It is good for analyzing trend direction and strength, providing clear entry signals and for foreshadowing weakness and reversal. The indicator is in of itself very useful but there have been some enhancements made over the years. This is a guide into some of the other tools based on stochastic and how you can use them in your trading.

The Williams% Ratio – Williams% Ratio is a spin on the fast stochastic indicator. While stochastic compares current closes to the low of the period Williams% compares to the high. This results in a negative number and an oscillator that ranges between 0 and -100, opposite to the fast stochastic. When compared to fast stochastic the lines are nearly identical. The major difference, aside from the scaling, is that Williams% Ratio does not include a signal line. This is a drawback as it does not provide signals on short term swings. However, it is still very useful for identifying support/resistance, trend analysis and to predict reversal.

The Stochastic Momentum Index – The stochastic momentum index, SMI, is an oscillator that compares closing price to the mid-point of the set range whereas standard stochastic is comparing to the low of the period. This creates a reading that is either positive or negative, and an oscillator that ranges above and below 0, rather than between 0 and 100. Another difference is that the readings are double smoothed which makes for a lot less whipsaws in %K. Regardless of the differences the indicator is read in exactly the same way as the standard model. However, instead of looking for overbought 80 and oversold below 20 you will be comparing peaks relative to past performance. There is a major drawback to this indicator as well. Because of the method in which it is derived, and due to the double smoothing, it is not effective at trend analysis and is more suited to determine shorter term overbought/oversold conditions.

Stochastic RSI – Stochastic RSI is actually a combination of two great indicators, stochastic and RSI. This indicator is a standard version of stochastic, but rather than using closing price in the formula, it uses the RSI reading. This gives a stochastic look at the relative strength of the underlying asset. At a glance you can see that this produces an indicator that is both faster and slower than the standard stochastic. The %K fluctuates wildly but creates a %D that is much smoother and slower moving, making it give off a lot of signals. This also means it can give off a lot of false signals so additional analysis will of course be required.

My Conclusions; Can You Improve On Stochastic

I have to say that no, you really can’t improve on the stochastic oscillator. It is easy to read, is based on sound theory, provides clear signals and is highly versatile. The others all try to make some improvement but all fall short for one main reason; they all introduce a fault into the indicator. Williams% Ratio does not include a signal line so is not useful for short term trading and swing signals. The stochastic momentum index is so smoothed that it smooths out half the signals the stochastic is intended to give. The stochastic RSI is so wild it creates a lot of whipsaws. By no means are these tools useless, they just aren’t as good as the tool they are based on. You just can’t beat stochastic. My advice to you is not to spend your time looking for a holy grail, or trying to improve on tried and true techniques. You will have much better success by focusing your attention on proven techniques and learning to use them appropriately.

Stochastics: An Accurate Buy and Sell Indicator

In the late 1950s, George Lane developed stochastics, an indicator that measures the relationship between an issue’s closing price and its price range over a predetermined period of time.   To this day, stochastics is a favored technical indicator because it is easy to understand and has a high degree of accuracy in indicating whether it’s time to buy or sell a security.

key takeaways

  • Stochastics is a favored technical indicator because it is easy to understand and has a high degree of accuracy.
  • Stochastics is used to show when a stock has moved into an overbought or oversold position.
  • it can be very beneficial to use stochastics and an oscillator like the relative strength index (RSI) together.

Price Action

The premise of stochastics is that when a stock trends upwards, its closing price tends to trade at the high end of the day’s range or price action. Price action refers to the range of prices at which a stock trades throughout the daily session. For example, if a stock opened at $10, traded as low as $9.75 and as high as $10.75, then closed at $10.50 for the day, the price action or range would be between $9.75 (the low of the day) and $10.75 (the high of the day). Conversely, if the price has a downward movement, the closing price tends to trade at or near the low range of the day’s trading session.

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Stochastics is used to show when a stock has moved into an overbought or oversold position. Fourteen is the mathematical number most often used in the time mode. Depending on the technician’s goal, it can represent days, weeks, or months. The chartist may want to examine an entire sector. For a long-term view of a sector, the chartist would start by looking at 14 months of the entire industry’s trading range.

Relative Strength Index

Jack D. Schwager, the co-founder of Fund Seeder and author of several books on technical analysis, uses the term “normalized” to describe stochastic oscillators that have predetermined boundaries, both on the high and low sides.   An example of such an oscillator is the relative strength index (RSI)—a popular momentum indicator used in technical analysis—which has a range of 0 to 100. It is usually set at either the 20 to 80 range or the 30 to 70 range. Whether you’re looking at a sector or an individual issue, it can be very beneficial to use stochastics and the RSI in conjunction with each other. 

Advanced Stochastic Indicators

Risk Disclosure: Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. Moreover, the leveraged nature of Forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses.

Advanced Stochastic Scalper Free

Advanced Stochastic Scalper Free is a professional indicator based on the popular Stochastic Oscillator.

This product is an oscillator with dynamic overbought and oversold levels, while in the standard Stochastic Oscillator, these levels are static and do not change. This allows Advanced Stochastic Scalper Free to adapt to the ever-changing market.

When a buy or a sell signal appears, an arrow is drawn on the chart and an alert is triggered allowing you to open a position in a timely manner and avoid sitting at your PC all the time.

Advanced Stochastic Scalper Free is a demo version that can be only run on USDCAD. Unlimited version can be purchased here:

Advantages of the indicator

  • The indicator is suitable for scalping and intraday trading.
  • It is possible to evaluate the effectiveness of the indicator on history.
  • The indicator does not redraw (recalculate), signals are generated strictly on the “Close of the bar”.
  • It can be used as a standalone tool or together with other indicators.
  • System of notifications to email and mobile device on new indicator signals.
  • Ability to customize the color scheme of the indicator.

Recommendations on using Advanced Stochastic Scalper Free

Buy signal: the indicator line crossing the oversold level upwards. If there are open sell positions, they should be closed. See screenshot #2.

Sell signal: the indicator line crossing the overbought level downwards. If there are open buy positions, they should be closed. See screenshot #3.

There may be situations with several consecutive signals in the same direction. In this case, open an additional position in the same direction without closing the previous one. See screenshot #4.

Several positions are to be closed only when an opposite signal appears.

Advanced Stochastic Indicators

This FREE custom version of the cTrader Stochastic Oscillator will highlight when an instrument is deemed to be oversold or overbought. A stochastic oscillator is a momentum indicator comparing a distinct closing price of an instrument to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values and this special indicator allows you to specify the upper and lower levels for trade signals.

If you are looking for a Stochastic indicator that will send a pop-up, email or instant Telegram message then click on the link below.

Paul Hayes
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