V.3:1 (28-29): Day Trading With Stochastics by John F. Kepka

V.3:1 (28-29): Day Trading With Stochastics by John F. Kepka
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Day Trading With Stochastics by John F. Kepka

I have been using the Stochastics oscillator "K" and "%D" for well over a year (RE: May and Sep 1984 issues of Technical Analysis of Stocks & Commodities magazine). I use Stochastics, (in conjunction with other indicators), with futures intraday data from half-hourly down to 1 minute bar charts. Initially, I tried to use the Stochastics indicator as outlined in Technical Analysis of Stocks & Commodities, but I quickly learned that the "clearly illustrated" patterns were largely non-existent in real time intraday trading. By following the general rules, the "Set-up" rapidly became expensive. Even "shooting from the hip" was better.

After considerable experimentation, I concluded that I definitely preferred the regular "K" and "%D" and not the slow version for both daily and intraday analysis. I like the "K" values for a quick indications of overbought and oversold. I have explored different time periods for the oscillator as well as different time periods for price bars. For the Standard and Poors (S&P) 500, I currently trade 5-minute time bars with a 10-period stochastics oscillator. Unless the market is moving in short cycles with greater amplitude, the standard 5-period stochastics is too "whippy" on intraday data. This is a recent event stemming from the fact that larger institutional participation has reduced some of the past futures market volatility.

Chart 1 illustrates a 5-minute bar chart, using the Intra-Day Analyst (IDA) computer software, viewing the September S&P 500 futures beginning around 1:00 PM on June 28, 1984 and continuing through June 29. Table 1 (IDA format) provides actual times, prices, and oscillator values necessary to resolve the patterns. Chart 2 is simply an extension of Chart 1. The "K" line is drawn as solid and "%D" line is dashed. Immediately you can see that these lines are not nearly as smooth nor as crisp as those illustrated on page 99-100 in the May 1984 issue of Technical Analysis of Stocks & Commodities magazine.

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