V.9:1 (14-16): Double Smoothed-Stochastics by William Blau

V.9:1 (14-16): Double Smoothed-Stochastics by William Blau
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Double Smoothed-Stochastics by William Blau

The stochastic oscillator devised by George Lane is one of the most useful and widely used tools in technical analysis. This oscillator is based on the current close in relation to the highest and lowest prices in a specified time interval (Figure 1). By definition, price increases as the close approaches the highest price of the interval and, conversely, decreases approaching the lowest price in the interval. A maximum is defined when price touches the highest price and then recedes. These characteristics are succinctly expressed by Lane's stochastic:


where the oscillations are normalized within a scale of zero to 100. The subscripts (5) indicate "during" the last five days.

The elegance of this expression is in its simplicity. The expression, however, usually suffers from oversensitivity. Too many smaller price changes are revealed, whereas only certain peaks and valleys are important. Ideally, smooth curves are desired to represent price where buying can be performed at or near a price valley, with selling at or near a price peak.

An additional oscillator, %D, is used to help signal market reversals. The formula for %D is:


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