YouTube Video
YouTube Video Transcript
[Music] hey this is David for big bits in this video we’re gonna take a look at the stochastic indicator as part of the indicator explained series on trading view and in this series what we are doing is we are discussing an indicator discussing kind of how it’s used what it is and most importantly the calculation for it and how this can help you understand movements and why the indicator kind of does what it does why is the stochastic seem to be very sensitive and move up and down very quickly okay so the stochastic first of all is an oscillating indicator it is bound between 0 and 100 it’s pretty similar to the RSI and the fact that it is an oscillator and its value is plotted relative to the price in the recent trading history for the particular security that you’re looking at on trading view so let’s go ahead and dig a little bit deeper on this and I’ve pulled up the investopedia article on this I’m gonna read over some of the things on here but we are going to after we do this we are going to move on to the calculation to show you how that actually works now I’ve already mentioned this is a oscillating indicator between 0 to 100 and the key takeaways they have are that it’s a popular indicator for generating overbought and oversold signals so going back to the indicator overbought would be anything above 80 oversold anything below 20 and it sounds very simple if you think of it that way and easy to trade if you just buy oversold and sell overbought but it’s not quite that easy so it’s a popular momentum indicator it was first developed in the 50s there’s some more information about that later in the article or just kind of gonna skim over that but the stochastic oscillators tend to vary around a an average price level since they rely on the assets history and that’s just saying that it’s a relative to the average price level because we are looking at a recent range of price history and the relative level to where that price is to the recent history so it might be a bit confusing but when you take a look at the calculation it’s actually not really that hard of a calculation I know this looks like it could be difficult but really see here stands for the closing price and you subtract from it the lowest price of the last 14 candles and that includes the current candle so if you are at the current low it’d be zero so normally though you’re going to be above it unless of course like I mentioned you’re at the lowest and you would divide this by the highest value minus the lowest value in the 14 so you’re taking the range essentially of the last 14 candles the highest value and the lowest value and you are taking the range from the current value down to the lowest value and you are defining that and then you are multiplying by 100 to get your percentage value a more readable percentage value I should say so calculation isn’t really that difficult there are some nuances you should be familiar with and that the percent K is sometimes known as the slow stochastic indicator the FASTA casseon indicator is taken as percent deed three period moving average okay I’ll get into this a little bit more later but the calculation you see here is actually the fast K calculation this is the standard K calculation and there is a difference between what’s here and what’s actually in tradingview so if you were to recreate this and try to plot K on training view your values would be different because training view actually uses something slightly different now the theory behind this one is that when prices are trending upward so will the indicator and when prices are turning downward so will the indicator so it’s kind of giving you idea of the current trend that you’re working with and it also highlights the fact that you should be looking for signals when the percent K crosses through the percent D so this actually happens quite a bit but they’re essentially saying the blue line here is the K by the way and the orange line is the D because it’s the smooth line but when the K the blue line crosses through the orange line that this would indicate it cross down so this would be the start of a downward trend now you’ll also notice that this can happen down here in lower places as well but you would also say the same for the opposite if the K were a cross over the D then that would represent a potentially bullish change and you would maybe at that point expect the trend to change upward so that is also something to keep in mind not only that but we’ve also already talked about the overbought and the oversold levels as well and speaking of that that’s actually the next thing they actually talked about it but they also make sure to highlight that very strong trends can remain overbought or oversold conditions for an extended period and this is very true with this indicator and price can sort of not change a whole lot even though it is high so you’ll notice that here and on the chart it is actually overbought dips out of it and comes back in it and it stays that way for a while trying to find a better example here of one on the daily chart on Bitcoin here and you can see this particular area it never went below the value here of around 66 from let’s see pretty much April first all the way until the end of May so that’s something to keep in mind and only maybe a week or a week and a half worth of that time was actually spent under the overbought value so it can stay overbought for a long period of time and that includes staying at very high levels like this up above even ninety and it oftentimes on shorter timeframes can go and actually tap out at 100 so that’s something to keep in mind as well that even though it is at these high values it doesn’t mean that it came that the price can continue to go higher and the opposite could be said for the lower range where once it stays down there that that doesn’t necessarily mean that it is going to not be able to go any further down even if it’s already at zero the price can still go down because the indicator is plotting relative to the price compared to the range of prices in the recent history so hopefully you’re still following me and that actually makes sense as to why having a high or low value on the stochastic RSI doesn’t really matter too entirely much while the trend is still moving in the same direction now one thing to look out for and this article just kind of briefly mentions it but one of the things a lot of people that I know look for on this particular indicator is what’s called a divergence and let’s see if we can find one I’m looking here guys so yes here is the divergence so this would be a bearish divergence because the price is going up but the peaks on your stochastic indicator are going down if you’re not familiar what with what a divergence is a bearish or bullish divergence then you can look on Google and search for that I’m gonna have a video on that here in the future you can always check back on the channel but this would indicate that the trend is losing its strength and when it does change direction again might be a good idea to change your position with the change in the trend so that is another method that they choose to mention here now we haven’t really talked a whole lot about the calculation and it does talk about the limitations of it that it can produce false signals we’ve already kind of talked about that but I did also want to highlight since it did say false signals and my head might have been in the way earlier when we were talking about this divergence but no I think it should have been something you could have seen so I’m gonna go ahead and now I just need to remember what I was talking about the false signals okay so you’ll notice here that the trend appears to change but it immediately changes back after just a few days so this might have been a false signal and a lot of times you’ll notice that there are false signals towards the top of these so you might want to adjust your settings on the indicator to weed those out or maybe even use a different indicator if you’re not willing to take the risk of those false signals being in there and of course I’m not a financial adviser I can’t tell you how to use the indicator exactly that’s kind of why we’re just kind of looking at these articles I’m more concerned with the math and understanding why the movements happen in the indicator itself now going back to the math you will notice that we have talked about the FASTA Casting oscillator and the slow stochastic oscillator now the calculation we had talked about here is actually the fastest ik calculation because it just gives us the basic K calculation and then our D in that case is just a three period SMA of the K and that’s something that might be hard to get used to and if you’ve looked at training view charts this is as I’ve mentioned before these slow stochastic calculations so what’s the difference really this slow stochastic oscillator basically takes your percent D of the fast one which is a smooth three period SMA of the K so you’re just taking the K and you’re smoothing it and you’re setting its value of the K to that smooth value which with the fast elastic calculation is actually the D and then with the slow stochastic calculation the D is also a three period SMA of the K so it’s smooth twice on the slow stochastic calculation and I’ll actually show you that now in the trading view code so this is the built-in indicator for the stochastic I’ve added this to our chart but now I’m going to pull up the pine editor and this code is actually available for you I’m not sure if it’s in all plans but when you pull down this drop down you can actually find stochastic in here and when you click on that it’ll load the source code template for the stochastic in here that way you’ll be able to go ahead and build on top of these it’s the cassock however you need to but for our purposes I’m just going to show you how this actually works now the stochastic calculation is done here using these this built-in function and these built-in variables and you can change these if you need to but this is the actual stochastic calculation and you’re using the period for K which you’ll notice is 14 and that is the range of candles backwards that you’re looking for the highs and the lows the SMA here is using the smooth K but if you were to set the smooth K value to 1 you would essentially just be using the fast calculation but since it is defaulted to 3 and then you’ll notice I’ve added default up here this is actually setting our K value to a smooth SMA of three so this is the slow stochastic calculation and then further beyond that it actually takes that K value and smoothes it again to get the D and it defaults to the value of three now you can change these however you like and if you want to see what the stochastic looks like the faster casick looks like all we have to do is take the stochastic built in on trading view change the smooth value to one and this is what the FASTA casting looks like so that’s something to keep in mind the in here you can see there probably definitely a lot of false signals so you can obviously play around with the different smoothing methods and you can try and reduce some of that lag to find signals that better suit your trading method so that is pretty much for it for this particular video I hope you’ve enjoyed it there’s several other videos like this where we go through and explain these particular trading indicators how you to use them and how the math behind them works so you can understand how the changes are going to occur or what impacts might happen to those indicators no matter which way the price would go so if you want to check out some of my scripts and the pilot script tutorial series that I have on youtube that’d be great you can check out my profile on training view big bits IO the leaves there’s links for that in the description of the video and while you’re down there if you don’t mind please just go ahead and like the video you’ve watched it all the way through I would really appreciate that and on your way back up you can also hit the subscribe button because if you’ve watched the video this far you’re probably gonna want to see other videos at least I’d like to think that way so if you don’t mind go ahead and subscribe and you’ll get more videos like this in the future but other than that I’d like to thank you and have a great day [Music]
YouTube Video Description
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Explained: The stochastic oscillator is a momentum indicator comparing the closing price of a security to a range of prices in the security’s most recent history. It is used to generate overbought and oversold signals within a 0-100 bound range. Fortunately, TradingView has the stoch or stochastic indicator available as a built-in indicator on the platform.
https://www.investopedia.com/terms/s/stochasticoscillator.asp
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