This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Using Stochastics to Ferret Out Trades

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( The FRED Report) -- There have been some interesting discussions on the financial news shows recently on how to use "stochastics" so we thought an article on how we use this indicator at The FRED Report would be useful to readers.

First, let's define these indicators. Stochastics are an indicator market analysts use to measure overbought and oversold conditions in traded instruments. The indicator shows where the current market is closing within the trading range over the last "X" periods of time. We like to display this indicator in the pane on the bottom of our charts.

Follow TheStreet on Twitter and become a fan on Facebook.

Moving averages are depicted on our price charts above stochastics, and are my favorite determinant of trend. We show a long-term chart below, and ask readers if your own investment performance is as good as that of a simple 5/20-monthly crossover strategy.

Most traders use stochastics to buy and sell without reference to trend, buying when the stochastic moves below and above 20, and then selling, and possibly selling short, when the stochastic moves above and then below, 80. While this is an acceptable way to use the indicator and can help traders make money on a short-term basis, there are ways to use the indicator in relation to the trend of a market. This enables a trend-following trader to enter the market in advance of a trend change, and then add positions on confirmation of that trend.

Obviously, this is riskier than simply waiting for a trend-following signal line the moving average cross depicts above, but it can pay dividends. We will show some examples below -- but first let's look at some background information. Also, please note that this is subjective and not a mathematically quantifiable methodology.

We advocate using a combination of daily and weekly charts, with daily charts used to refine our view of the trend, and daily charts used to enter in the direction of the weekly trend. We use the 5- and 20-week moving averages, as well as price patterns, to determine the trend on the weekly chart. For the stochastics, a buy indicator moves below, and then back above 20, and a selling indication moves above, and then below, 80.

On the chart above, readers can see two examples of this strategy, one short from late July through August, and another minor signal into the October low. The second main indication is a buy on the stochastic in early October, followed by a cross of the moving averages to add another position. The moving averages still have the trader long this market. We show another example below.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
DBO $14.49 0.00%
GLD $115.00 0.00%
AAPL $126.41 0.00%
FB $81.21 0.00%
GOOG $575.33 0.00%

Markets

DOW 18,135.72 +38.82 0.21%
S&P 500 2,101.04 +2.51 0.12%
NASDAQ 4,982.8090 +15.6680 0.32%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs