Vol. 8 No. 7 July 2013

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Keller’s Tips & Tricks p. 5 By Jeff Keller

Stochastic Oscillators p. 2by Kent Kofoed

PitNews.com Magazine July 2013 1

In this issue...

Keller’s Tips & Tricks by Jeff Keller

Stochastic Oscillatorsby Kent Kofoed

Off The Wallby Spike

The Benefits of Advantage Linesby Heather Rich

2PitNews.com Magazine July 2013

tochastic oscillators are momentum indicators that use support and resistance levels in order to

identify possible turning points in the price of an underlying asset. There are two main types of stochastic oscillator indicators, Slow Stochastic (SSTO) and Fast Stochastic (FSTO), and the only difference between them is that they have differing levels of price sensitivity (the SSTO indicator is less sensitive to price changes, when compared to the FSTO indicator) due to a slight variation in the way each indicator is calculated. The main inputs to the stochastic oscillator indicators include the following: current closing price, lowest price over a given period, and highest price over a given period. The first decision that needs to be made when setting up a stochastic oscillator indicator, however, is the number of periods that is going to be used, which is typically denoted as n periods, for the indicator. The number of periods that is chosen will usually depends on the average length of a trade and typical values for n will usually be somewhere around 5, 9, or 14 periods. Once the number of periods has

been chosen, both the lowest price and the highest price of the period can be used in the indicator equation. The equation for the first part of the basic stochastic oscillator is as follows: This equation is simply the difference between the current asset price and the low price of the period divided by the range of the period (i.e., high price minus low price), which is then multiplied by 100 (which is only done so that the possible values of the indicator fall between 0 and 100, instead of 0 and 1). When the current price is near the lowest price of the period, the difference between the two values will be relatively small and the value of %K will be close to zero (i.e., the difference will be small relative to the range between the high price and the low price, which means that the small difference will be divided by the relatively large range). On the other hand, if the current price is near the highest price of the period, the difference between the two values will be

By Kent Kofoed

Stochastic Oscillators

PitNews.com Magazine July 2013 3

relatively large and the value of %K will be close to 100 (the difference will be close to, or possibly equal to, the range between the high price and the low price). Anyways, don't worry if what I just said doesn't make a whole lot of sense.. The only thing that really needs to be remembered about calculating the %K value is that when the current price is near the highest price of the period, prices are near resistance and the value of %K will be close to 100, and vice versa when the current price is near the low price of the period (i.e., prices are near support and the value of %K will be close to 0). Once each %K value has been calculated (one %K is calculated for each rolling time period), a moving average of %K is taken, which is typically a 3-period moving average. The results is that you now have a %K value and a %K moving average

value, for each rolling time period, and a buy signal occurs whenever the value of %K crosses above the value of the %K moving average and, on the other hand, a sell signal occurs when the value of %K crosses below the value of the %K moving average. The end result is the Fast Stochastic indicator (FSTO). In order to get the Slow Stochastic indicator (SSTO), an additional moving average is used (which is also typically a 3-period moving average), and, instead of using %K and the %K moving average, the %K moving average and the moving average of the %K moving average are used. This decreases the sensitivity to price changes even further (i.e., it slows down the impact that new price changes have on the indicator) and results in an indicator that is less likely to react prematurely to a recent price move (i.e., its reaction is "slower," which is why it is called a "Slow" Stochastic indicator).

PitNews.com Magazine July 2013 4

In the Track n' Trade Live chart shown below, both SSTO (the indicator window with blue and white lines) and FSTO (the indicator window with red and white lines) indicators are included. Both indicators are using the same inputs (a 14-period price history and a 3-period moving average), so the only difference between the two indicators is the relative difference in their sensitivity to price changes, and, as expected, the SSTO indicator is much less sensitive to price changes (because of the additional moving average used in the SSTO calculation, mentioned previously). The yellow lines, which are shown near the top and bottom of each indicator window, are typically set at 80% and 20% for the top and the bottom, respectively. Whenever the stochastic oscillator indicator is above the 80% line, the current price is near the top of the most recent n-period trading range and prices might be reaching a possible resistance level. On the other hand, whenever the indicator is below the 20% line, the current price is near the bottom of the most recent n-period trading range and prices might be reaching a possible support level. Reaching either of these levels can be viewed as a signal of a possible reversal in momentum and a subsequent crossover of the %K value and the %K moving average value (also known as %D) is a confirmation of the reversal signal. In summary, stochastic oscillator indicators are momentum indicators that use support and resistance to identify possible turning points in the price of an underlying asset. When the price of an asset is currently trading near the top of its recent trading range, this may be an indication that prices are nearing resistance. Similarly, when the price of an asset is currently trading near the bottom of its recent trading range, it may be an indication that prices are nearing support. Lastly, the number of periods used for both the SSTO and FSTO indicators is an important parameter that will depend on both the average holding period of a typical trade and the characteristics of the asset that is being traded (e.g., the typical price behavior that occurs when the current price of the asset in question reaches support or resistance). Kent Kofoed is a technical analysis specialist, as well as an individual trader, who has a Bachelor's degree in Business Administration from Utah State

University and a Masters of Security Analysis and Portfolio Management degree from Creighton University. Additionally, Kent is a level II candidate in the CFA program, a graduate student in the Masters of Science in Predictive Analytics program at Northwestern University and a contributing author for PitNews Magazine.

PitNews.com Magazine July 2013 5

By Kent Kofoed

Hello everyone, it's Jeff again with more of Keller's Tips and Tricks. Today I want to tell you about my favorite wave charting tool, the 'Zig Zag / Elliot Wave' chart overlay. Why is this my favorite wave tool you ask? Because it’s my favorite way to quickly spot waves simply- and because I like to be so efficient-that I get to be lazy, too! The quicker I am at what I am required to do, the more free time I have to not be doing it. To activate your Zig Zag in the Tack ‘n Trade platform, right-click within your chart window and click Chart Overlays > Zig Zag / Elliot Wave. This will place in the white waves and buy/sell arrows in your chart window. Zig Zag will have a default '% Change Sensitivity' of 5% across all charts. This is based on daily charting and not your intraday charts. This is also the default for futures, forex, stocks, lean hogs, ETF's, platinum and everything else. Defaults are chosen for being the best fit for everything across the board. When I'm looking for waves on the EUR/USD, I'm only interested in the chart in front of me, and I want my indicators fine-tuned for exactly what I am looking at. I've said it before a hundred times and will say it again, defaults are good, but I want excellent. See an example below of the EUR/USD chart I just created with Zig Zag turned on.

On the right-hand side of the your chart window you will see a flat white line with a price, in this case it is showing as 1.27476 (pictured below). This is your Zig Zag Retracement Target. This line tells me specifically what price the market has to reach in order to break the trend and create a new Zig Zag wave. If the market continues to move downward, the

Retracement Target will continue to follow downward, it will only hold it's current position if the market begins to retrace your current wave.

Each wave will be accompanied by a labeled dotted white line (pictured here). This is not your Zig Zag wave, this is showing you

a percent Retracement of a completed wave. The last wave shows a retracement of 0.697, which means that the current Zig Zag wave location was an overall retracement of 69.7% of the height of the previous move. See example 1:2 (on p. 6) for what I would personally use on the daily EUR/USD.

I prefer purely wave lines that I label myself. I want to include the smaller retracements that were not detected with the default sensitivity. Note how after fine-tuning my % Change Sensitivity I now included the two retracements of the overall bullish

Keller’s Tips and Tricks

Example 1:1

6

move from November to February (which also happened to follow a nice 1-2-3 wave pattern seen in Elliot Wave theory). I'm not as interested right now in my wave retracement percentages.

This also updated my new Retracement Target to: 1.32445.

Now that I have the Zig Zag setup for my daily EUR/USD chart, I will either save my work or write

down my % Change Sensitivity I use for this specific market to use from now on. If I believe this market is going to retrace my last wave, I draw in my 123/ABC tool over the last Zig Zag wave, and add the 3-4/C-D projection (example 1:3). If the market continues to move downward, I will move my point 3 down to match the newest low which will automatically update the 123 projection. I will not place a trade while the market continues to fall, as I'm not in the habit of trying to catch a falling

knife by the edge. I will wait until I see a retracement before created a new trade to buy. Also, I will not wait until my Zig Zag Retracement Target has been reached to create my long order. I do not want to miss that much of a market move. All that said, just because Jeff does it, doesn't mean you have to do it the same. Give it a try though and feel free to let me know what you think. Have a great day and best of trades.

Jeff Keller has been with Gecko Software for six years, and is currently the Track 'n Trade Technical Support & Education Manager. You can find Gecko Software online at: www.GeckoSoftware.com. Jeff makes himself available for calls and consultation during regular business hours, call Jeff at: 1-800-862-7193 Ext 3.

Example 1:2

Example 1:3

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