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10.38 Stochastics

Stochastics are an oscillator and signal line described by George Lane based on each day’s close within the total trading range of past N days. This should not be confused with stochastic processes etc in mathematics, the two are unrelated.

The %K line is the close position within the past N-days trading range (highest high to lowest low) expressed as a percentage 0 to 100.

             close - Nday low
%K = 100 * --------------------
           Nday high - Nday low

An extreme of 0 is reached for a close at the day’s low which is also a new N-day low. Likewise 100 for a close at the day’s high and a new N-day high. A signal line %D is added by smoothing %K with a simple moving average (see Simple Moving Average).

%D = SMA[D] of %K

The default periods in chart are 14 days for %K, and 3 days smoothing for %D. The %K line is drawn in red and the %D line in green.

%K and %D just described are called the “fast” stochastics. Corresponding “slow” stochastics are formed by smoothing %K with a simple moving average, and calculating %D from that smoothed series. The extra smoothing is the “slow days” parameter in Chart. The default is 0 for no slowing, a value of 3 is often used.

Incidentally, a value of 1 for the slowing is the same as no slowing, because a 1-period SMA of course doesn’t change the data.

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