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Intraday Application of Stochastics

The application of the stochastic indicator (SI) as originally developed by George Lane offers considerable potential for day traders as well as position traders. Those who are familiar with the immediate action sigВэnals which were presented in the Stochastic Fantastic book co-authored by Mark Silber and myself are aware of how the SI may be valuable both in position trading as well as in short-term trading.* The immediate action signals are also likely to be applicable in the day-trading time frame; however, they have not yet been fully tested.

This chapter will illustrate some basic applications of stochastics for the purpose of day trading and will provide some guidelines regarding SI application and applications, possible limitations, advantages, and expectations.

Explaining Stochastics Quickly and Simply

As many of you already know, the stochastic indicator consists of two values, percent K and percent D. Percent D is a derivative of percent K. Percent K is derived itself from the fast stochastic indicator which is derived using a simple mathematical formula. We will be working with the slow stochastic indicator, so termed because it is a moving average of the fast stochastic indicator and, therefore, makes slower oscillations. It is well known that stochastics can be used in many different ways.

Sometimes I feel that there are as many different applications of SI as there are futures traders; SI is one of the most popular contemporary indicators in the futures markets. This, in and of itself, does not mean that SI is the best indicator. On the contrary, it may very well mean that as commonly used SI may be one of the worst indicators. Although I do not believe that this is true, I am by nature a contrarian. When applied consistently and with concise trading rules, the SI in its traditional applications can be a profitable indicator for day traders (and others as well). Here is a synopsis of the basic stochastic indicator followed by some of the more traditional applications for day traders and then by my stochastic pop (SP) method which is, I feel, one of the more effective methods of day trading.