What is Stochastics?

John Sunshine
John Sunshine
Man holding a globe
Man holding a globe

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 is a mathematical method used by technical analysts to assist in predicting the direction of the price of a particular stock.

Stochastics is based on the facts that the market is made up of people and that any large social group as a whole will behave in a somewhat predictable manner. Since the market is also influenced by outside factors, such as current news events and random events, the patterns may be obscured by this "noise". Stochastics is a complex mathematical method for attempting to find patterns amongst this "noise".

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

To make things easier, many charting services compute stochastics data and display the resulting graph. The interpretation of the graphical data is left to the user. There are two popular methods for calculating stochastics, a slow stochastics and a fast stochastics method. It is important to know which is used on any particular charting service. Unfortunately, this information is not always readily displayed. You may need to write to the publisher and request this data.

Stochastics is possibly the most arcane and obscure of the various tools a market timing investor might use. Finding a broker who understands stochastics may be a challenge. Many financial advisors are also of the opinion that this challenge is best not pursued.

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