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-o0(GoldTrader)0o- · 11-07-2009, 05:16 AM

How to use Divergence with Stochastics

Quote:

Originally Posted by Blaiserboy

Describe what you feel to be the correct way.........

Divergence is a warning that a turn is near.

Quote:

Originally Posted by George Lane

In working with %D it is important to remember that there is only ONE valid signal. That signal is a divergence between %D and the security with which you are working.

%D (5,3,3) is a leading indicator. Stochastics compares the closing price of a security to its price range, to predict turning points. That is what it does.

Quote:

Originally Posted by George Lane

A 3-line Stochastics will give you an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow.

Typical values for N are 5, 9, or 14 periods. Smoothing the indicator over 3 periods is standard. Chart it correctly. Run a 5,3,3 next to what you are using now to see the difference. Stochastics should be charted as a 3-line oscillator to get rid of all this nonsense about fast, slow and super slow. You need at least three things to act on divergence, the best being at a double (or triple), bottom.

Quote:

Originally Posted by George Lane

The signal to act on this divergence or convergence comes when %K crosses on the right-hand side of the peak of %D in the case of a top, or on the right hand side of the low point of %D in the case of a bottom.

In the appropriate crossover areas, at a cycle bottom.

1. Divergence
2. Right hand cross
3. Crossover area
4. Cycle bottom

Just run this over the history of whatever security you are trading. You will see the patterns repeat, and learn what to expect when you see them again. The main thing is to use Stochastics as directed by George Lane.

Your initial sources should be George himself:

Jake Bernstein: who worked with George to develop the “Stochastics pop,”
• ^ Hot Stock Market Strategies: 5 Secret Investm… (2005) by Jake Bernstein pg 57 ISBN-10: 1932531254
• ^ Jake Bernstein's “The Complete Day Trader.
and traders like:

John Person: a student of Lane’s who has taken up the pen on Stochastics.
• ^ Person, John L (2004) A Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators pg 144-145 ISBN-10: 047158455X

Google up a search on “Lane Stochastics,” in books once and awhile, and keep informed. “Lane's Stochastics,” was written after thirty years of active trading.

• ^ “Lane's Stochastics,” Lane, George M.D. (May/June 1984) second issue of Technical Analysis of Stocks and Commodities magazine.

This is not the complete story, if you or anyone else is interested email me. And I will email you a copy of one of the books from his classroom. The story here is in the charts. Imagine learning from George Lane’s actual charts, do you want to see some charts?

• ^ “Getting Started With Stochastics,” by George C. Lane & Caire Lane (1998)

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