This article is from the Glossary of Technical Analysis Terms.
The Stochastic Indicator is based on the observation that as prices increase, closing prices tend to accumulate ever closer to the highs for the period. Conversely, as prices decrease, closing prices tend to accumulate ever closer to the lows for the period. Trading decisions are made with respect to divergence between % of "D" (one of the two lines generated by the study) and the item's price. For example, when a commodity or stock makes a high, reacts, and subsequently moves to a higher high while corresponding peaks on the % of "D" line make a high and then a lower high, a bearish divergence is indicated. When a commodity or stock has established a new low, reacts, and moves to a lower low while the corresponding low points on the % of "D" line make a low and then a higher low, a bullish divergence is indicated. Traders act upon this divergence when the other line generated by the study (K) crosses on the right-hand side of the peak of the % of "D" line in the case of a top, or on the right-hand side of the low point of the % of "D" line in the case of a bottom. Two variations of the Stochastic Indicator are in use: Regular and Slow. When the Regular plot of the Stochastic too choppy, the "Slow" version can often clarify the results by reducing the sensitivity of the calculations. The formula is:
Note: 5 Days is the most commonly used value for %K
The %D line is a 3 day smoothed version of the %K line
%D=100(H3/L3) where H3 is the 3 day sum of (C-L5) and L3 is the 3 %day sum of (H5-L5)
STARC bands create a channel surrounding a simple moving average. The width of the created channel varies with a period of the average range; thus the name ('ST' for Stoller, plus 'ARC' for Average Range Channel). STARC Bands, in a fashion similar to Bollinger Bands, will tighten in steady markets and loosen in volatile markets. However, rather than being based on closes, the STARC Bands are based on the average true range, thus giving a more in depth picture of the market volatility. While the penetration of a Bollinger Band may indicate a continuation of a price move, the STARC Bands define upper and lower limits for normal price action.
The Swing Index (primarily for use with commodity trading) attempts to determine real market direction, and changes in direction, by making use of the most significant comparisons between the results (Open-High-Low-Close) of the current and previous days' trading.