Stochastics indicate when the market or any stock condition is either overbought or oversold. These conditions are the basis for for all trades. When the Stochastic is below 20% or at zero, its time to go long. When the Stochastic is above 80% its time to sell. Thats the general rule, but there are exceptions. During a rally, the 80% market for selling does not apply because the stock will continue even when the stock becomes overbought. From a standpoint of a MM or specialist, the psychology states that most trades will short when the Stochastic is at 80% or higher, therefore MM and specialists will go against the general grain of understanding by pushing the stock higher, therefore 'creaming the shorts'. Thats the absolute ground zero approach to trading, where the objective of the MM or specialist is to always have the trader sell off in a loss whether its an uptrend or a downtrend. Stochastics are perhaps one of the most useful indicators for entering and exiting a position, but there are exceptions. Again, in a downtrend, the stock can fall well below 20% or well below zero Stochastic and not bounce up significantly. It depends on the stock. Most high volume trading stocks like CHKP, CIEN, and the likes will bounce up to give you a point or two, or even half point. The point is that Stochastics work with relatively little understanding of voodoo or over analysis techniques. The point is to react to the market, not think about what to do, and the Stochastics offer a fairly well guideline. Thanks.
Stochastics are most effective (in my experience) during intraday. The reason being that any fluctuation should be no more than a point, depending on the overall trend and the stock. If you rely on Stochastics using a ten day chart for example, chances are that the actual overbought or oversold conditions will differ from the intraday indication. Stochastics are relative in time. It all depends on your trading time frame. For me, intraday stochastics are effective.
Stochastic isn't a magic indicator, nothing is. As a word of caution Stochastic fail in a trending market. rtharp
Zarrar What values do you set for %K and %D on your intraday stochastics. Also when the indicator goes flat line against the 0 or the 100 line and you know it is actually going further, is there another indicator you can use to tell how far up or down it is actually going and when it is reversing. Thanks for your help.
Wirehead, Im not sure what you mean by setting values, do you mean setting them in a TA program or setting them as your measure to get in or out? Either way, there are three market conditions that you should be aware of. 1) Rally or Bull 2) Downtrend 3) Flatline, channeling, consolidation. Once you have identified the trend, then you can work with stochastics in that relative market. As mentioned in another post, in a rally, the 80% stochastic will always be breached as the stock will continue to rise. The same holds true for a downtrend. One thing to remember is that a channelling market is always at the end or beginning of a trend. If there was an uptrend for 3 days, and the market goes flat, chances are that the trend will reverse, but actual confirmation can only come when the market actually moves in this new direction, or continues on its current course. Stochastics work well in any market, but are most concise in a chanelling trend. In short, know what trend you are in, and then use the stochastic intraday. As far as answering your question, there is no known method for trading that will result in 100% accurate trades. So I cannot tell you what indicator to use in order to determine where price movement will go once the 0 or 100 stochastic are breached. It would be nice to know though.
Stochastics is nothing more than a trailing indicator which tells you if whatever it is you are watching is at the low end or the high end of its trading range (based on the timeframe you have choosen). If stochastics starts to move up from an oversold position that means the stock is moving back up. Nothing you couldn't have already figured out if you just look at the chart of the stock itself. Same thing for an overbought stochastics reading, the stock is moving down. Could have seen that by looking at the chart. Since this is based on a time frame that you specify, even this information is very subjective. Of course stochastics starts moving up everytime the stock does, that's what it is tracking and designed to do. DJC
DJC, The reason stochastics are important is that suppose a stock is falling, it stops, bounces a half point and continues to decline another three points before going up significantly or rallying. Without looking at the stochastic, the first stop in the decline would look like a point to enter a long position. However, most first stops during a stock decline are not stochastic 20% or zero, they are above 50. If the trend is a rally, then the stock can continue to rise from stoch 50. It really depends on the trend. MMs will create stops only to have the stock fall further. There might be three stops in a declining stock, and only on the fourth will it actually decide to go long. That determination is best indicated by stochastics. Stochastics are not a holy grail aspect, they are guidelines, suggestions for when to enter or exit. For the most part, in most stocks, they are quite accurate with some slippage. Without slippage, there would be not market.
Zarrar The reason stochastics are important is that suppose a stock is falling, it stops, bounces a half point and continues to decline another three points before going up significantly or rallying. Without looking at the stochastic, the first stop in the decline would look like a point to enter a long position. Not if you were looking at a chart and using any other indicators (trend lines, support resistance levels,moving averages, etc.)you would see that the stock had not retraced to a buy point. However, most first stops during a stock decline are not stochastic 20% or zero, they are above 50. If the trend is a rally, then the stock can continue to rise from stoch 50. Stochastics really aren't very effective in a trending market, which is why they can rally from stochastics reading of 50 as you say. It really depends on the trend. MMs will create stops only to have the stock fall further. There might be three stops in a declining stock, and only on the fourth will it actually decide to go long. That determination is best indicated by stochastics. Again, why would this BEST be determined by stochastics? None of us know when a stock will "actually decide to go long". You are talking about the concept of the sensitivity of your indicators. Certainly stochastics are less sensitive than buying the first up tick, but just about any indicator gives you more guidance than that. Stochastics may give you a buy or sell signal based on the time frame you have specified, but how did you pick your time frame? Wouldn't it be based on some type of analysis of past turning points in the stock? And aren't these turning points support/resistance levels? You are using these other concepts to help set up your stochastics and then pronouncing the stochastics as superior to them. DJC
DJC, There is no such thing as a superior element. This is only in my experience, and everyone has their own trading niche. This is not to say that trading is a personal game, and subject to individual perception. However, there is a great deal of psychology and emotions built into trading. Its more than just fear and greed. From my view point, stochastics are great for intraday, thats the time frame that I use. Of course, everyone might not be comfortable trading every little glitch, tick and hiccup, but thats where the time frame comes in. So in short, using stochastics intraday is what we're talking about, reason being that support and resistance are already in place somewhat. And finally assuming that all trades are day trades and no overnights and that you're trading for the here and now. Of course there are no guarantees in anything.