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How Does It Test?: 138 Martin Pring On Market Momentum

Colby and Meyers tested the Stochastic Indicator and found a profitable combination involving a 39-week unsmoothed %K line that generates buy and sell signals based on specific conditions. They noted that consistent profits were achieved with periods ranging from 38 to 66 weeks, with the 39-week span being the most effective. The Stochastic is best utilized alongside daily, weekly, and monthly indicators to monitor trends effectively.

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32 views1 page

How Does It Test?: 138 Martin Pring On Market Momentum

Colby and Meyers tested the Stochastic Indicator and found a profitable combination involving a 39-week unsmoothed %K line that generates buy and sell signals based on specific conditions. They noted that consistent profits were achieved with periods ranging from 38 to 66 weeks, with the 39-week span being the most effective. The Stochastic is best utilized alongside daily, weekly, and monthly indicators to monitor trends effectively.

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TUAN NGUYỄN
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© © All Rights Reserved
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138 Martin Pring on Market Momentum

How Does It Test?

In Encyclopedia of Technical Market Indicators Colby and Meyers tested the


Stochastic Indicator for the effectiveness of a number of rules and
parameters, and found that the vast majority of combina tions were
unprofitable. This research was based not only on 1977-86 weekly data for
the NYSE, but also on the experience of Schwager and Strahm ( Technical
Analysis of Stocks and Commodities, July 1986). Colby and Meyers finally
discovered a profitable combination, although it did not compare
favorably with most of the other indicators that they tested. The rules
they established called for a buy signal when the 39-week unsmoothed
%K line (n = 39 with no moving average) crosses above 50%, and the %K
and closing price are both above their previous closing levels. They
decided to both sell and sell short when these conditions are reversed
(i.e.. when %K moves below 50% and the %K and closing prices are below
their previous week’s levels). They note that fairly consistent profits were
achieved for periods (in other words, the n value) ranging from 38 to 66
weeks, but they reported that the 39-week span proved to be the most
profitable period used. Note that the %D was not used in this particular
rule.

How To Use the Stochastic Effectively

The Stochastic is most effective when you keep daily series in


conjunction with weekly and monthly. In this way the daily indicator
monitors the short-term trend, the weekly indicator the intermedi ate term,
and the monthly the long-term trend. As we will discover in the next
chapter on the KST Market Cycle Model System, trading in the direction
of the main trend is very important. This approach is not possible with all
momentum indicators, but the Stochastic lends itself well to this
important discipline. However, it is important to remember that the
Stochastic calculation requires period highs and lows in addition to the
closing price.

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