What Are the Best Settings for Stochastic Oscillators?
Stochastic oscillators, developed by George Lane in the 1950's, track the evolution of buying and selling pressure, identifying cycle turns that alternate power between bulls and bears. Few traders take advantage of this predictive tool because they don't understand how bet to combine specific strategies and holding periods.
It's an easy fix, as you will see in this quick primer on Stochastics settings and interpretations.
What are the best settings for stochastic oscillators?
Stochastics Construction
The modern or "Full Stochastic" oscillators combines elements of Lane's "slow stochastics" and "fast stochastics" into three variables that control look back periods and the extent of data smoothing
Picking the Best Settings
Choose the most effective variables for your trading style by deciding how much noise you're willing to accept with the data. Understand that whatever you choose, the more experience you have with the indicator will improve your recognition of reliable signals.
Short-term market players tend to choose low settings for all variables because it gives them earlier signals in the highly competitive intraday market environment.
Long-term market timers tend to choose high settings for all variables because the highly smoothed output only reacts to major changes in price action. Cycle turns occur when the fast line crosses the slow line after reaching the overbought or oversold level.
The responsive 5,3,3 setting flips buy and sell cycles frequently, often without the lines reaching overbought or oversold levels.
The mid-range 21,7,7 setting looks back at a longer period buy keeps smoothing at relatively low levels, yielding wider swings that generate fewer buy and sell signals.
The long-term 21,14,14 setting takes a giant step back, signaling cycle turns rarely and only near key market turning points.
Shorter term variables elicit earlier signals with higher noise levels while longer term variables elicit later signals with lower noise levels, except at major market turns when time frames tend to line up, triggering identically-timed signals across major inputs.
These large cycle crossovers tell us that settings are less important at major turning points that our skill in filtering noise levels and reacting to new cycles. From a logistical standpoint, this often means closing out trend following positions and executing fading strategies that buy pullbacks or sell rallies. It's one of the best settings for stochastic oscillators.
Stochastics and Pattern Analysis
Stochastics don't have to reach extreme levels to evoke reliable signals, especially when the price pattern shows natural barriers. While the most profound turns are expected at overbought or oversold levels, crosses within the center of the panel can be trusted as long as notable support or resistance levels line up.
Moving averages, gaps, trendlines or Fibonacci retracements will often intercede, shortening a cycle's duration and flipping power to the other side. This highlights the importance of reading the price pattern at the same time you interpret the indicator.
Many traders fail to tap into the power of Stochastics because they are confused about getting the right settings for their market strategies. These helpful tips will remedy that fear and help unlock more potential.
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Article Source: http://EzineArticles.com/expert/Alberto_Pau/863211
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