Stochastics Trending Downward from High

Stochastics is a measure of the relationship between current price and the range of price over a given number of periods. The stochastic indicator is plotted as the %D line and the %K line with values ranging from 0 to 100. Typically, values above 75 indicate a strong upward trend has occurred and the price is closing near its high. Values below 25 indicate the price has been falling and that the price is closing near its low.

The theory behind the Stochastics indicator is that in an upwardly trending market prices close nearer to their highs while during a downward trending market prices close nearert to their lows. One observation with stochastics (either %K or %D) is that if they fall below a specific level (ex. 20) and then rise above that level it may be a buy opportunity. Similarly, if it rises above a specific level (ex. 80) and then falls below that level it may be a sell signal. When the %K or %D lines begin to flatten out this is can be an indication that the trend will be set for a reversal. Another interpretation often suggested is to buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

This example shows how one can use more than 1 stochastic filter at a time. First note that we are using the k% fast stochastic line = 15 and the d% slow stochastic at 5 (the 5 day moving average of the k% 15). When you view the charts you will want to go to indicators, to daily charts, and set the stochastics k% to 15 and d% to 5 after you run this filter. Now looking at the 2 stochastics filters.

First we have set the k% fast stochastic to a value above 75. Any stochastic value must lie between 0 and 100 and when we filter these stocks out they will all be above 75. This may indicate the stock is over bought and due for a downturn.

The second Stochastic filter extends the concept of the first. That is, it allows us to also specify that the k% 15 line is at least 5% lower than the d% 5 line. This indicates that the fast line is on the decline, just ahead of the moving average of the k% 15 (this is the d%5 line). By doing this we can not only find stocks that appear over bought using the first filter but also we can specify the trend of the fast stochastic is downward.

Note that the above example applies to overbought stocks by setting the limit stochastic value to 75. You can also do the reverse and set the stochastic value to a minimum of 25 indicating the stocks may be oversold.

There are many ways to use the stochastics filters and there are many websites giving information on their usage if you do a search on the web for "stochastics indicators".

Note that on all the below examples that the red line (fast stochastic k%15) is below the blue line (slow stochastic d%5) and that the k%15 line is over 75 on the scale.

Click on the images to enlarge them.

How to Screen Out these Stocks with ChartSmart

Creating this Filter List is quite simple. You can view the criteria and their settings in the criteria settings as shown. Next click on RUN FILTERED LIST, close the filter menu and go to the chart menu. Next click on the GRP button and then use the FORW button and BACK button to scroll through the charts in your filtered list.

Watch the video of this strategy.

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