Comparing Indicators: Stochastics %K versus
by Thom Hartle
Ironically, technicians today suffer from overabundance. Compared with the dearth of only a few years
ago, technical analysis packages today offer so many indicators that a trader can be overwhelmed. As a
consequence, building a trading system based on an array of technical indicators requires painstaking
investigation to assure that each indicator is appropriate for the task in question. A typical trading system,
for instance, could have long, intermediate- and short-term indicators intended to produce trading signals
with different time horizons. Now, many indicators have demonstrated unique rates of success for
individual markets for different time horizons. On one hand, a simple moving average is a good indicator
of the direction of a intermediate- to long-term trend, but it is ill-suited to forewarn of a possible reversal.
On the other hand, an oscillator will alert a trader of a loss of momentum setting the stage for a reversal,
but it will produce ineffective signals regarding the trend, perhaps signaling reversals while the trend
continues. The choice of technical studies can confuse more than enlight.
One problem arising from a surfeit of indicators is the possibility of two different indicators duplicating
signals. An example of this situation is the application of the stochastics indicator (%K) and Williams'
%R. Both indicators are overbought/oversold oscillators. In fact, both of these oscillators observe the
(The stochastics oscillator has two components: %K and %D. Our concern here is directed toward %K,
because %D is simply a three-day smoothed version of the %K and not germane to the comparison of the
stochastics %K and Williams' %R.)