What Is the Worden Stochastic?

The Worden Stochastics indicator represents the percentile rank of the most recent closing price compared to all other closing values over a specified lookback period. Traders use the indicator to determine if a particular security is overbought or oversold, to provide trade signals, and to spot divergences that could signal a price reversal.

Understanding the Worden Stochastics

Peter Worden created the Worden Stochastics indicator to identify a new trading range faster than standard stochastics. The Worden Stochastics indicator uses ranks rather than typical stochastics, which include high, low, and closing prices, to prevent over-weighting during outlier times. This could result in a more accurate representation of the trading range.

The formula for calculating the Worden stochastic is (100/n-1) x rank. “Rank” indicates the closing price’s position on a list arranged in ascending order by value, while “N” means the number of closing values in the range.

Worden stochastics and other stochastic indicators evaluate the closeness level of the range over time. Traders use these measurements to assess if a particular investment trades at overbought or oversold levels.

Using Worden Stochastics for Trading

Stochastic readings are often regarded as overbought when over 80 and oversold when below 20. Traders must endeavor to validate these thoughts using additional technical indicators or chart patterns. It’s only sometimes that an overbought or oversold market indicates it’s time to purchase or sell. During a robust price increase, stochastic values often rise beyond 80. The values in a severe downturn are usually less than 20.

Usually, the stochastic has a signal line. Some traders see the stochastic crossing over the signal line as a buy signal. A possible sell signal is when the stochastic crosses below the signal line. Finding a stock (or other asset) in a rising trend might be one technique, combining that idea with the abovementioned ones. After that, watch the Worden stochastic drop below 20 or lower. Think about buying when the stochastic swings up and out of the oversold area or crosses above the signal line. This is just an example; it is not a suggested action.

Traders may also search for divergences between the price of the securities and stochastic trends, either bullish or bearish. A possible price reversal to the negative may be indicated if the cost reaches higher peaks while the stochastic reaches lower peaks. There is a bullish divergence and a potential price reversal if the stochastic makes higher lows while the stock makes lower lows. Divergence is not a trustworthy timing indicator. It should only be used in tandem with other trading signals and studies.

The Stochastic Oscillator and the Worden Stochastics

The computation method of the Worden variation sets it apart from other stochastics, whether slow or fast. The latest closing price is compared to high and low values in most other stochastic indicators over a certain period. Worden utilizes the close’s rank for different closing values to determine how to proceed with the computation.

Constraints on Worden Stochastics

The indicator often sends out many false indications. For instance, during an uptrend or downturn, the hand will spend considerable time in an overbought or oversold zone.

The signal line also has many crossings, but none of them are factors that prevent the price from moving significantly. Furthermore, the indicator’s price divergence is not a trustworthy timing indication.

Example of Using Worden Stochastics in the Real World

In this Worden Stochastics example, three complete Disney purchase and sell cycles are carved over four months using default parameters of 1 through 5 (signal line in blue).

Amid April, the signal turns up at the oversold level, but the price still chops laterally before falling amid calm market activity. Early in May, the indicator shows a decline, followed by a double bottom reversal that results in a roughly three-week-long rising wave.

A crossing in mid-May starts a new cell cycle, and the price retreats to test fresh support at 100. The indicator rises as the price approaches a new high in early June. There is a bearish crossing in late June, and the stochastics move back into the oversold area as the price drops. Since the general trend is now upward, a long trade might have been started around the beginning of July, with the next bullish crossing above the signal line.

Both the indication and the price rise. The indicator stays in the overbought zone for most of July and the first part of August. One might consider any of the bearish crossings as a tip to sell. Another indication to sell would be if the stochastics fell below 80.

conclusion

• Unlike other stochastics, the Worden Stochastic ranks closing prices by allocating a value according to how the most recent close compares to earlier ones.
• The Worden variant of stochastics uses signal line crossings to offer possible trade signals in addition to overbought and oversold levels, much like conventional stochastics.
• A value below 20 is considered oversold, while a reading beyond 80 is overbought. This may only sometimes indicate whether to purchase or sell. It signifies the price is either above or below its most recent closing price range.