Stochastic
Indicators Part 2
T
he second line, %D,
is a smoothed version of the %K line. The
normal value is three periods.
The %D formula is
%D
=
100 X (Hs/Lg)
W
here Hs is the
three-period sum of ( C - A) and Lg is the
three-period sum of (Hs - A). The momentum indicator
that results from these calculations is two lines that
fluctuate between 0 and 100. The %K line is
usually plotted as a solid line, while the slower %D
line is usually plotted as a dashed line. A good way
to differentiate between them is to think of the fast
%K as "kwick" and the slow %D as "dawdle."
T
he popularity of the
stochastic can no doubt be explained by the smooth
manner in which it moves from an overbought to an
oversold condition, lulling a trader into a feeling that
price trends are much more orderly than would appear
from an observation of an RSI or an ROC indicator.
L
onger-term time frames,
used on monthly and weekly charts, appear to work much
better than the shorter-term stochastic indicators used
on daily futures charts. Overbought and oversold
bands are usually plotted in the 75 to 85 percent area
on the upside and in the 15 to 25 percent area on the
downside, depending on the time span in question.
An
overbought indication is given when the %D line
crosses the extreme band, but an actual sell alert is
not indicated until the %Kline crosses below it. When
the two lines cross, they behave very similarly to a
dual MA system. If you wait for the penetration, you can
avoid getting trapped into shorting a strongly bullish
move or buying into an extremely negative one.
Momentum Indicator - Stochastic
Indicators Part 2
