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+ | ====== The 'Last' Stochastic Technique ====== | ||
+ | ===== Introduction ===== | ||
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+ | 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. | ||
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+ | For more information on the Stochastic Oscillator, please see our [[:technical_indicators:stochastic_oscillator_fast_slow_and_full|ChartSchool article]] on this indicator. | ||
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+ | ===== Stochastic Signals ===== | ||
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+ | 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. | ||
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+ | 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. | ||
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+ | 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. | ||
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+ | {{:trading_strategies:the_last_stochastic_technique:stochastic-msft2.png?nolink&}} | ||
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+ | 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. | ||
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+ | {{:trading_strategies:the_last_stochastic_technique:stochastic-msft3.png?nolink&}} | ||
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+ | 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. | ||
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+ | {{:trading_strategies:the_last_stochastic_technique:stochastic-csco1.png?nolink&}} | ||
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+ | 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. | ||
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+ | {{: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.]] | ||
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+ | 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. | ||
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+ | ===== Conclusion ===== | ||
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+ | 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. |