Free Stochastics Booklet

[-oo0(GoldTrader)]

Stochastics is never wrong
Many authors make up there own rules about what oscillators are supposed to indicate. When they lose they claim the oscillator is unreliable, or it gives false signals or some other excuse. When used as directed Stochastics is reliable; it does not give false signals, it does not act too fast.
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What Stochastics shows
George and the guys in the pits, noticed that prices tend to close near the extremes of the recent range just before turning points.

In an uptrend, prices tend to make higher highs and the settlement price usually tends to be in the upper end of that time periods trading range. When the momentum starts to slow, the settlement prices will start to fade from the upper boundaries of the range.(2004) A Complete Guide to Technical Trading Tactics:

What Stochastics does is compares the closing price of a security to its price range to predict turning points. Stochastics turns down at or before the final price high.
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Charting Stochastics correctly

A 3-line Stochastics will give you an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow.
(1998)Getting Started With Stochastics

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How to use Divergence
[FONT=&quot]Divergence is a warning that a turn is near.

Divergence - convergence is the only signal, which will cause you to buy or sell.

Divergence - convergence is an indication that the momentum in the market is waning and a reversal may happen soon. The signal to act is a '''divergence - convergence''', in an extreme crossover area, with the crossover on the right hand side, at a cycle low.

An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.
(1999) Technical Analysis of the Financial Markets:

When you have the divergence, act when the faster line, crosses the slower line, on the right hand side, i[FONT=&quot]n the appropriate crossover areas, at a seasonal bottom.[/FONT]

[FONT=&quot]1. Divergence
2. Right hand cross
3. Crossover area
4. Cycle bottom[/FONT]

[FONT=&quot]Just run this over the history of whatever security you are trading. You will see the patterns repeat, and learn what to expect when you see them again. The main thing is to use Stochastics as taught by George Lane.[/FONT]
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Stochastics pop
This is when prices pop through and keep on going.

:Rules:
:Increase long position - When price crosses the upper band from below.
:Increase short position - When price crosses the lower band from above.
:Liquidate position - When Stochastics %D crosses %K in direction reversed to open trade.
(1995) The Complete Day Trader

The bands drawn on your chart are somewhat arbitrary. You must understand that just because prices go up and through your bands, this does not mean prices have to turn around any time soon. Where is your divergence?
Where is your crossover?

In working with %D it is important to remember that there is only ONE valid signal. That signal is a divergence between %D and the security with which you are working.

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