What’s Stochastic?

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Stochastics is a technical market analysis tool developed by Dr. George Lane. Technical market analysis is an investment method that attempts to “time the market” or predict market direction based on past behavior. Stochastics are a mathematical method used by technical analysts to help predict the price direction of a particular security.

The stochastic is based on the fact that the market is made up of people and that any large social group as a whole will behave somewhat predictably. Since the market is also influenced by external factors, such as current news and random events, patterns can be overshadowed by this “noise. Stochastic is a complex mathematical method of trying to find patterns among this “noise”.

There are several methods used to calculate stochastic data and there are numerous interpretations given to this data. Proponents of various interpretations of market stochastics argue that their particular approach is the most valid. Since no one seems to be able to provide a conclusive case, many technical investors using stochastics combine more than one interpretation and use the combined outcome as a basis for their investment decisions.

To make things easier, many charting services calculate stochastic data and display the resulting chart. The interpretation of the graphic data is left to the user. There are two popular methods of calculating the stochastic, a slow stochastic and a fast stochastic. It is important to know which one is used on a particular charting service. Unfortunately, this information is not always readily available. It may be necessary to write to the publisher and request this data.

The stochastic is perhaps the most arcane and obscure of the various tools a market timing investor could use. Finding a broker who understands stochastics can be a challenge. Many financial advisors also believe it is best not to pursue this challenge.

Smart Asset.

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