What are Stochastics?
The Stochastic is a technical analysis indicator that determines the stock's current rating. Is it Bullish? Is it Bearish? The indicator compares a company’s closing price with its price range over a given amount of time. In this way it attempts to tell if a stock is undervalued or overvalued and whether it is due for a pullback or a upward movement. The mathematics behind it looks like this. %K = 100[(C - L14)/(H14 - L14)] In the formula above C is the most recent closing price of the stock. L14 is the low for the previous 14 days. H14 is the high for the previous 14 days. It may look tricky, but you do not have to figure it out all by yourself. Most stock charts will allow you to place the indicator on the bottom of your chart like this. When a Stochastics is moving up, this is a sign the stock price may be due to move up. When the Stochastic move down, it is a sign that the stock prices may be due to move down.
If we look at our example, when the stochastic begins to move up, it gives off a buy signal when the stock is at $57. When it starts moving down it gives a sell signal, in this example the stock is trading at $82. In this example the stochastic would have made $25 or 43%. which is an excellent return and beats the market by a wide margin. A professional trader may use this indicator alongside other indicators to confirm the buy and sell signals that the stochastic gives them.
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