At twopercentgoal.com we are always looking to get better, and I know we have done just that. We are now using two more technical analysis tools for better performance, greater consistency and ultimately better returns. Those tools are the stochastic oscillator and on balance volume (OBV). I will talk about OBV next week, but today I will focus on the stochastic oscillator.
The stochastic oscillator was developed by George Lane in the late 1950s. It is a momentum indicator showing speed and momentum of price movement. The word stochastic literally means random but a stochastic process is a mathematical process that can be modeled with a set of random variables making a forecast. The term oscillator refers to situations where a price is overbought or oversold.
In an interview, Lane said that momentum changes direction before price and this tool is helpful identifying overbought or oversold conditions. The calculation uses the current closing price, the lowest low and the highest high over a set period. To see how the exact calculation is made I refer you to stockcharts.com. The net result is a number between 0 and 100. If the figure is above 80, it is overbought; if it is below 20, it is oversold. If the chart has fallen below the 80 level, it is ideal for shorting; if it rises above 20, you should buy it.
This is exactly what we are doing at twopercentgoal.com. Taking advantage of stocks that are priced too high or too low and generating a 2% profit per week. Done consistently over a year, you can double your money. We are not day traders but swing traders. The difference between the two is simply the time horizon. A day trader trades intra-day while a swing trader holds a position for a few days to a few weeks.
The stochastic oscillator and the on-balance volume (OBV) will be used with our existing tools of the Relative Strength Index (RSI), the 50-day/200-day moving averages and the moving average convergence divergence (MACD). All tools need to tell the same story before a trade is entered.
While it is very easy to play Monday morning quarterback, had all the tools been implemented during the month of May, our recommended list would have been perfect. Presently, I am going through a back testing exercise for the last year, and the results look very encouraging. I look forward to sharing those results with you in the coming weeks.
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Al