Understanding the Stochastic Indicator

[mose]

Originally Posted by TheCrack

do you only get back in if the 8/17 line crosses the 9 line at the same time its breaking up thru to 20 marker again?

Ideally, you want it to not only break through 20% but to continue upward from there. If the stochastic is at or below 20% when the lines cross, that is a signal to buy, but it is a weak signal. It could easily cross in the other direction, because there is no strength or power behind it. You want to see that it is more like a rocket being launched (it doesn't have to be straight up, but it needs some force behind it) rather than a balloon being let loose and flying all over the place, if that makes sense.

In his blog, Phil talks about getting back in at or below 30% MOS after you have been stopped out, given that you initially entered at 50% MOS and everyting about the wonderful business is still wonderful. That way you can kind of pick up from where you left off. If you just jump into any business at 30% MOS rather than 50% MOS, you increase the risk and aren't really doing Rule #1 investing, anymore.

mose

[mose]

In the book, Phil says to watch for all 3 indicators to indicate a sell. In his blog, Phil says that when the price stops going up and there are 2 sell indicators, he gets out. So, you don't have to absolutely wait until the third indicator. If 2 indicators say to sell and the stock price is not going up, you are probably in a sell mode.

As for buying or selling between 20/80, you can buy and sell with the indicator, but, of course, you are consulting all 3 signals for a buy. Generally, if the stochiastic is heading down through 80%, it tends to continue heading down, and it will be confirmed by the other two indicators. If you are getting a buy signal from all 3, there is an upward trend from the stochastic and the MACD is above 0, then that is a pretty strong sign that the stock is in an uptrend, and you can buy.

mose

[TheCrack]

Thanks for that Mose....

[wadetg]

I thought that I understood this, but now I’m confused again. Phil’s book says that the stochastic buy/sell signal is when the lines cross each other.

In his blog, at: http://philtown.typepad.com/phil_tow...the_arrow.html , way down in the comment section, he says this

Originally Posted by Phil Town

“Investools gives a green arrow on the stochastic when it crosses the 25 line. Which is about the same time as the crossing of the 14/5 lines.”

In the charts that I’ve seen, I don’t see the correlation between “crossing the 25 line” and “crossing of the 14/5 lines”.

So… Which do you believe is the true signal? Can someone who has Investools verify where exactly you get a green arrow?

Thanks,
Tom W

[mose]

Originally Posted by wadetg

In the charts that I’ve seen, I don’t see the correlation between “crossing the 25 line” and “crossing of the 14/5 lines”.

I don't have Investools. Let me restate it.

"Investools gives a green arrow on the stochastic when the stochastic crosses the 25% line. Which is about the same time as the crossing of the stochastic's 14/5 lines."

Phil must be referring to a specific example displayed in Investools, as the stochastic lines could cross anywhere.

mose

[wadetg]

So comparing Stockchart's & MSN's two line method with Investool's & Business Week's arrows that show up as you cross through the 25 & 75 lines, which gives you a better signal to buy/sell? These events do not always happen at the same time.

TomW

[mose]

Originally Posted by wadetg

which gives you a better signal to buy/sell?

I don't think there's an answer to your question. This is not like the precision gear movement of a Swiss watch. It's more like the sloppy loose chain on that old bicycle you used to ride as a kid. I don't have Investools. So, I can't compare the two. However, my guess is that either it is random as to which signals first, or one (I assume the 14/5) will always signal a little before the other due to the settings.

Because of the "loose fit" of the stock market, either indicator should still work fine. Neither is meant to get you in at the very bottom or out at the very top. To the contrary, it will always cut the top and bottom off, because you enter the market when you are convinced things are going up, and you exit the market when you are convinced things are going down. The convincing part always takes a little time.

mose

[eddr]

On MSN the Slow Stochastic plots with the red line and black line and I understand that when the black line crosses above the red line, it is a buy signal or equivalent to a green arrow. However, when I check the Slow Stochastic on BusinessWeek, I get a green line for the same recommended settings (14,5,0) and it is a green arrow or buy signal when it crosses above the 25% level and a red arrow or sell when it drops below the 75% level. On MSN, I get the lines crossing multiple times while on BusinessWeek, it stays green once it goes above the 25 level until it goes above the 75 and then drops. Do I need to consider the signal as a green arrow or buy only when the black line is above the red on MSN or do I need to consider the signal as a buy or green arrow until it changes on the BusinessWeek chart? Basically should I pay more attention to BusinessWeeks"s arrows or to the lines when they cross on MCN? I may not be understanding how this works so would appreciate any clarification anyone can give to this issue.

[TheCrack]

Eddr,
I had wondered the same thing not long ago, especially with so many different sites out there where you can look at charts(MSN, Businessweek, stockcharts.com etc)....
I noticed that MSN uses the 80 and 20 markers to reflect overbought and oversold respectively, as opposed to Businessweek(as you mentioned), which uses the 75 and 25 marks for the same thing....

Im not sure why Sites use one vs the other, but I can tell you that I decided to try each site for a while, and Ive had much better results relying on the Businessweek site vs MSN....

What I do now, is check Businessweek, and if I have 3 greens, I check to see if there is a trend currently for the stock(up or down), just to confirm the arrows....

Personally, Ive had good luck doing things this way, and Ive also noticed that even when a company has been in a downtrend. the Green arrows have been working if I buy when they say(Even though I know its not smart to fight the trend)....

Of course, Ive been doing this while paper trading, and only with Companies that I have already proven as 'Rule #1' worthy....

Im gonna continue this for a bit longer to see how consistent it is, and would definitely like to hear yours and/or anyones feedback as to what they have used that works for them....

Regards....

[catdishy]

ON Aug. 20, The Crack wrote he used the Businessweek charts, as I am trying as well. Do you use the 3 month , or shorter? I find too many arrows on shorter cycles but wonder if there are enough on the 3 month. I still don't understand these charts other than Buy on 3 G and sell on 3R, for purposes of papertrading at this stage.

Thanks.

Diane