from http://stockcharts.com
The Stochastic Oscillator is a momentum or price velocity indicator developed by George Lane. The calculation is very simple:
K=[(C-L)/(H-L)]*100
Where:
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K = Lane's Stochastic
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C = latest closing price
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L = then-period low price
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H = the n-period high price
Additionally, Lane's methods specifically required that the K be smoothed twice with three-period simple moving averages. Two other calculations are then made:
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SK = three period simple moving average of K
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SD = three period simple moving average of SK
The classic interpretation of a stochastic can be complicated. The basic method is to buy when the SK is above the SD, and sell when the SK moves below the SD. However, the stochastic employs a fixed period-to-period calculation that can move about erratically as the earliest data point is dropped for the next day's calculation. Due to this instability and false signals generated, using a stochastic for entry and exit signals can incur a lot of unprofitable trades. To compensate for this inherent weakness, buy signals are generally reinforced when the crossover occurs in the 10-15% ranges, and sells in the 85-90% range.
Unfortunately, many techniques for using the stochastic oscillator can produce consistent losses over time. Some analysts have recommended smoothing the data further, or looking for a confirming overbought/oversold ratio prior to selling or buying. Most secondary filters such as overbought/oversold indicators degrade the performance of the stochastic in that one does not take advantage of major trends, getting whipsawed in and out.
K39 - The Last Stochastic Technique
A study published in "The Encyclopedia of Technical Market Indicators" found that some very good signals were given by an un-smoothed 39 period stochastic oscillator (K = 39, no signal line). A buy signal is generated when K crosses above 50% and the closing price is above the previous week's high close. Sell and/or sell short signals are created when the K line crosses below 50% and the closing price is below the previous week's low close. Taking a longer period, and not smoothing the data over a 3-period moving average allows the analyst to view Lane's Stochastic.
Note: You can add the Last Stochastic to our SharpChart charting tool by adding a "Slow Stochastics" indicator with parameters of 39 and 1. Here is an example. Alternately, you can choose "Chip's Mutual Funds" from the "ChartStyles" dropdown.
The 'Last' Stochastic Technique
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