TRADING THE STOCHASTICS INDICATOR

I used to think only price bars could predict the future. I started as a novice, experimenting with every indicator in the book. I could never get the markets to match my mathematics, so I finally gave up and became a pattern reader. In fact, my early writings are so pattern-centric they appear intolerant of all other trading techniques.

I've had a change of heart in recent years because of a tool that's saved my neck on a ton of trades -- the overused and underappreciated stochastics.

What exactly is the stochastics oscillator? It may seem like a simple question, but the answer isn't. The term describes a mathematical process that has an infinite progression of random variables. Let's dumb it down a bit. Stochastics measures how a market closes each price bar relative to its range over time.

This is urgent information for all types of traders. Scalpers use it to read the tempo as money flows through their one-minute charts. Investors use it to identify cycles as weekly stochastics alter the balance of power. But this valuable tool won't give up its secrets easily, and it requires thoughtful interpretation.