STOCHASTIC is one of the most popular Momentum Indicators used in Technical Analysis of Charts.
Stochastic means something which can be well described by a random probability distribution.
George Lane developed this indicator in the late 1950s.
We use the Stochastic indicator to determine good entry points within a Trend.
Today, we are going to find out how this Stochastic Indicator is calculated.
Stochastic indicator consists of - %K and %D.
To calculate stochastic –
1. Calculate the value of %K
%K = (Ctod – Ln) / (Hn – Ln) x 100
Where Ctod = today’s close
Ln = the lowest point for the selected number of days
Hn = the highest point for the selected number of days
n = the number of days for stochastic as selected by the user
The standard value of ‘n’ used is 5, but the trader might experiment with different values. A lower value helps catch more turning points. A higher value helps catch major turning points.
2. Calculate the value of %D
%D = [3 day sum of (Ctod – Ln)] / [3 day sum of (Hn – Ln)] x 100
The values of %K and %D are then plotted on the same chart
Stochastic is designed to fluctuate between 0 and 100.
We all use Computer software / mobile apps for our chart analysis.
So, for us STOCHASTIC IS CALCULATED AUTOMATICALLY.
But, if I am going to use any tool in my Chart Analysis, then I always feel more in control, if I know how it is calculated.
So, Just in case, if you want to try calculating it manually,
Also, you can check out manual calculation guides for EMA and MACD indicators.
So, How do you use Indicators in your Technical Analysis?
Which is your favorite Indicator?
Let me know in your comments below.