Lane's Stochastics |
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Lane's Stochastics
In technical analysis of securities trading, Lane's Stochastics oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane promoted this indicator in the 1950s. The term stochastics refers to the location of a current price in relation to its price range over a period of time. [1] This method attempts to predict price turning points by comparing the closing price of a security to its price range.
- In working with %D it is important to remember that there is only one valid signal—a divergence between %D and the security with which you are working. [2]
Definition
Stochastics finds the range between an asset’s high and low price during a given period of time. The current securities price is then expressed as a percentage of this range with 0% indicating the bottom of the range and 100% indicating the upper limits of the range over the time period covered. The idea behind this indicator is that prices tend to close near the extremes of the recent range before turning points.
A 3-line Stochastics will give you an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow. [3] Typical values are 5, 9, or 14 periods. Smoothing the indicator over 3 periods is standard.
Dr. George Lane, a financial analyst, is one of the first to publish on the use of stochastic oscillators to forecast prices. According to Lane, the Stochastics indicator is to be used with cycles, Elliot Wave Theory and Fibonacci for timing. In low margin, calendar futures spreads, you might use Wilders parabolic as a trailing stop after a stochastics entry. A centerpiece of his teaching is the divergence and convergence of trendlines drawn on stochastics, as diverging/converging to trendlines drawn on price cycles. Stochastics predicts tops and bottoms.
Interpretation
The signal to act is when you have a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom. [4] As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.
Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high. [5]
An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line. [6]
Stochastics pop
This is when prices pop through and keep on going - that is, break out.
- Rules to follow:
- Increase long position — When price crosses the upper band from below.
- Increase short position — When price crosses the lower band from above.
- Liquidate position — When Stochastic %D crosses %K in direction reversed to open trade.[7]
References
- ↑ Murphy, John J. (1999). "John Murphy's Ten Laws of Technical Trading".
- ↑ Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.
- ↑ Lane, George C. & Caire (1998) "Getting Started With Stochastics" pg 3
- ↑ Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.
- ↑ A Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators |last=Person |first=John L |year=2004 |publisher=Wiley |location=Hoboken, NJ |isbn=0-471-58455-X |page=144-145
- ↑ Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications |last=Murphy |first= John J |authorlink=John Murphy |year=1999 |publisher=New York Institute of Finance |location=New York |isbn=0-7352-0066-1 |page=247
- ↑ The Complete Day Trader |last= Bernstein |first= Jake |authorlink=Jake Bernstein |year=1995 |publisher= McGraw Hill |isbn=0-07-009251-6 |location= New York
External links
- Stochastic Oscillator at Investopedia
- Stochastic Oscillator page at StockCharts.com
