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Neal: I also notice, Dick, that another one of your favorite turning-point indicators is stochastics. How about a quick definition of that? |
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Dick: Stochastics is a turning-point indicator. The theory behind this indicator is fairly basic. Rising prices are usually accompanied by closes fairly near the highs of the range. Accordingly, prices that close near the middle may suggest a market that is not trending. |
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Dick: Don't worry too much about that. Merely think of it as a stochastic value. |
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Neal: And what does % D value represent? |
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Dick: That's merely a moving average of the % K. |
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Neal: So % K will always move faster than % D? |
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Dick: Right, because %D is amoving average. Let me make it easy for you. In general, values below 30% mean oversold and values above 70% tend to mean overbought. The %K and %D lines have to cross above 70 or below 30. |
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Neal: So in a strongly trending market, a market can stay overbought as well as oversold? |
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Dick: I think Figure 3-5 helps illustrate the point. |
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Neal: What's another favorite indicator you like to use? |
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Dick: I also like a relative strength index (see Figure 3-6). |
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