Trader's Toolbox: Stochastics (K%D)

Yesterday you freshened up with the Williams %R oscillator. Today we have an indicator that you may or may not be familiar with as well.Like we have said before, if you have used other technical analysis indicators previously, you can use a combination of the studies and other techniques in conjunction with the "Trade Triangles" to further confirm trends.

The stochastics indicator created by George Lane measures the relative position of the closing price within a given time interval. This indicator is based upon the premise that prices tend to close near the upper portion of a trading range during uptrends and near the lower portion of a trading range during downtrends. When prices close in the middle of a range, this suggests a sideways market. There are two components to this calculation, the %K value and the %D value. The %K is calculated as follows: %K= (C-Ln / Hn – Ln) x 100 where C = closing price of current period, Ln = lowest low during n time periods. Hn = highest high during n time periods and n = number of periods.

The %D value is the moving average of the %K value. The simple moving average calculation is: %D = 100 (Hn / Ln) also in the %K formula.

These formulas produce two lines that oscillate between a scale of 0 and 100. As with the other oscillators, a stochastic value below 30% suggest an oversold condition, while a value greater than 70% suggests an overbought condition.

Some simple trading rules apply in the use of the stochastics indicator. A sell rule would be to sell when the fast (%K) crosses over the slow (%D) and both are pointing down, but are still above the 70% level. A buy signal would be triggered when the fast crosses the slow, and both point up, but are below the 30% level.

Another type of signal occurs when the stochastics indicator diverges from a price move similar to momentum and RSI.


You can learn more about the Stochastics and George Lane by visiting INO TV.

4 thoughts on “Trader's Toolbox: Stochastics (K%D)

  1. I understood B Hass's question above. I scrolled down Hass asked the same question I was going to ask. Problem: I didn't understand imi's reply.

  2. Thank you for your description
    But as all people using MQL4, there is some information like that in Help section about this Indi and others
    But if you suggested something new, it would be more attractive for your viewers
    For ex.
    You can compare the use of this indicator with different adjustment in different time frame(M5,M30,H4,D1)
    This will be more practical
    Any way i thank you again for your valuable information

  3. Trader’s Toolbox: Stochastics (K%D)
    June 5, 2011 by jennifer
    Filed under: MarketClub Techniques, Tips & Talk

    "The %D value is the moving average of the %K value. The simple moving average calculation is: %D = 100 (Hn / Ln) also in the %K formula."

    %D sems to have two different definitions in the above two sentences since "%D = 100 (Hn / Ln)" is not the formula of a moving average, as stated. Please clarify

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