Stochastics

I’m not going to explain stochastics, there are plenty of places on the web that you can read up and learn about this indicator, like here and here.

I don’t use stochastics as I’m looking at stock charts during the day. But I do use stochastics in one particular scan that I run every night. I call it “Stoch 4 under 12″ and it’s a pretty fruitful scan. Like the stocks I find in all my scans, I go through every chart and look for candle patterns, price action and moving averages to decide if it fits my watchlist.

All I’m looking for is a divergence between the fast and slow stochastics. I want the fast stochastics (4.2) to be oversold and the slow stochastic (12.3) to be overbought. The stocks the scan finds are stocks that are in a longer term uptrend, but a short term pullback. I’ll point them out in the chart below.

So here it is: If you have TC2007 or TCnet, you can just copy this into a Personal Criteria Formula (PCF) and create your own scan.

If you use other software (I have re-created this in Tradestation’s scanner) you can just duplicate it using the software’s language. All it’s looking for is that the slower stochastics 12,3,3 is over 60 and the faster stochastics 4,2,2 is under 40. I encourage you to play with these numbers and experiment to observe the results. You’ll get a better understanding of your scan, as well as a better understanding of stochastics.

UPDATE
So here’s the same stock a few days later. There was one more day of dipping, but then a reversal and a week of snapping back as the faster stochastics caught up with the slower stochastics. In this particular instance, a 2 dollar gain in 6 days….I’d take that every day!

• Moving Averages
• MACD