Stochastics

Stochastic, according to Magee, is “the relating of the closing price to the range in prices for a prior time period, usually 21 days.” Magee goes on further to say that the idea of stochastic is based on the observation or belief that in rising markets, closing prices have a tendency to cluster near the top of the range, and the reverse being true in down trending markets as well; in sinking markets, closing prices tend to cluster near the bottom. The 21- day stochastic relates today’s close to the price range from the previous 21- day period. The price range is the difference between the highest price and the lowest price. Stochastic is expressed as a percentage, and the point is plotted on a scale from 0 to 100. Above 80% is considered as overbought, and below 20% is believed to be oversold (95).