In order to reduce trading risk, the Stochastics indicators may be combined
with our volume indicators.
Stochastics is calculated according to the
following formula:
Raw Stochastics = 100 * (Recent Close - Low(n)) / (High(n)
- Low(n))
%K = 3-period moving average of Raw Stochastics
%D = 3-periods moving average of %k
Where n is the number of periods used in the calculation.
In the table above, you can monitor Stochastics for
several US Indexes and Exchanges using 9-day, 14-day, and 20-day periods. In
the same table, we also show the 1/10 PVO (Percentage Volume Oscillator)
How to Use Stochastics and
our Volume Indicators:
Stochastics shows how far the most recent close is away
from the lowest low and highest high (in the calculated period):
If the 20-day Stochastics is greater than 80%,
the security is close to a 20-day high;
If the
20-day Stochastics is below 20%, that security is close to a 20-day
low.
The 1/9 PVO (Percentage Volume Oscillator) shows how high
recent daily volume production is to the average volume generation over
the past 9 trading days.
If the
1/9 PVO value is greater than 1.15, this indicates that we have a
volume surge that exceeds the average volume output over the past 9
trading days by 15%.
The market will not always reverse when Stochastics
exceeds 80% (or when it trades below 20%), just as the market will not
always reverse when we see volume surges. However, the probability of
a reversal is much higher when volume surges occur close to index highs
or lows (as indicated by the Stochastics).
As a
rule, Volume Surges (indicated by a high PVO) that appear during
an index advance - when combined with closes near the highs (i.e.,
Stochastics > 80%) - indicate potential downside reversals.
As a
rule, Volume Surges (indicated by a high PVO) that appear during
an index decline - when combined with closes near the lows (i.e.,
Stochastics < 20%) - indicate potential upside reversals.
Ignore
Volume Surges that appear when Stochastics exceeds 20% and is below
80%. Market reactions could be short-lived.
