The 'Last' Stochastic Technique

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trading_strategies:the_last_stochastic_technique [2019/06/24 19:39]
trading_strategies:the_last_stochastic_technique [2019/06/24 19:39] (current)
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 +====== The '​Last'​ Stochastic Technique ======
  
 +===== Introduction =====
 +
 +Many techniques using the Stochastic Oscillator produce consistent losses over time. In particular, overbought/​oversold signals often degrade overall performance because one does not take advantage of longer trends. The Last Stochastic Technique addresses this shortfall.
 +
 +For more information on the Stochastic Oscillator, please see our [[:​technical_indicators:​stochastic_oscillator_fast_slow_and_full|ChartSchool article]] on this indicator.
 +
 +===== Stochastic Signals =====
 +
 +A study published in "The Encyclopedia of Technical Market Indicators"​ found that some very good signals were given using the 39-period Fast Stochastic. A buy signal is generated when %K crosses above 50 and the closing price is above the previous week's highest close. Sell signals are created when %K crosses below 50 and the closing price is below the previous week's lowest close. ​
 +
 +Taking a longer period setting and not smoothing the data with a 3-period moving average allows chartists to use the Stochastic Oscillator in its purest form (Fast Stochastic Oscillator). This unsmoothed version, however, can increase whipsaws. It is often useful to smooth %K with a 3-period SMA and use the Slow Stochastic Oscillator.
 +
 +On the daily chart below for MSFT, we see the Slow Stochastic Oscillator (39,1) crossing above 50 on June 14th for a bullish signal.
 +
 +{{:​trading_strategies:​the_last_stochastic_technique:​stochastic-msft2.png?​nolink&​}}
 +
 +Chartists with a long-term outlook can turn to weekly data. On the three-year Microsoft chart below, we see that the Slow Stochastic (39,1) was above 50 for over two years and did not cross below 50 until late February 2000.
 +
 +{{:​trading_strategies:​the_last_stochastic_technique:​stochastic-msft3.png?​nolink&​}}
 +
 +On the daily Cisco (CSCO) chart, we can see the Slow Stochastic Oscillator (39,1) moving above 50 in November 1999 and not crossing back below it until April 2000. This was a good trend, but there were whipsaws (bad signals) on either side.
 +
 +{{:​trading_strategies:​the_last_stochastic_technique:​stochastic-csco1.png?​nolink&​}}
 +
 +Since the Stochastic is a price momentum indicator, one should pair it with a volume assessment for trade confirmation. In the chart below, the [[:​glossary_o#​on_balance_volume_obv|On Balance Volume]] (OBV) indicator has been added, along with a 30-day MA as a signal line.
 +
 +{{:​trading_strategies:​the_last_stochastic_technique:​stochastic-csco2.png?​nolink&​}}\\
 +[[https://​stockcharts.com/​h-sc/​ui?​c=CSCO,​ULDACLYYMY%5BDD%5D%5BP%5D%5BVC60%5D%5BILH39,​1%21LG30%5D|Click here for a live version of the chart.]]
 +
 +Notice that there was a bullish OBV crossover in early November 1999, while %K was above 50. %K moved below 50 in April; this move was confirmed as OBV moved below its 30-day SMA. %K moved back above 50 in late April, but the price momentum signal was not confirmed by OBV. Thus, no signal. Both indicators triggered bullish again in early June.
 +
 +===== Conclusion =====
 +
 +Keep in mind that all stocks are unique. While the 39-period Slow Stochastic Oscillator is a useful technical indicator, one should always map the performance against your specific stock. For example, some stocks have evidenced a tendency to signal entry when %K crosses above 40 and a sell when %K crosses below 60. Furthermore,​ chartists should consider using another indicator or two for confirmation when dealing with volatile stocks.