Stochastics: Decoding Pattern of Randomness

Monday, November 28, 2022
Category: Forex Trading

It is a counting process, which is a stochastic process that represents the random number of points or events up to a certain time. The number of process points located in the interval from zero to some given time is a Poisson random variable that is dependent on that time and some parameter. This process’s state space is made up of natural numbers, and its index set is made up of non-negative numbers. This process is also known as the Poisson counting process because it can be interpreted as a counting process. Unique to Ambit Stochastics are ambit sets, which allow the delimitation of space-time to a zone of interest, and ambit fields, which are particularly well-adapted to modelling stochastic volatility or intermittency. These attributes lend themselves notably to applications in the statistical theory of turbulence and financial econometrics.

The resulting Wiener or Brownian motion process is said to have zero drift if the mean of any increment is zero. If the mean of the increment between any two points in time equals the time difference multiplied by some constant μ, that is a real number, the resulting stochastic process is said to have drift μ. To make the learning of the Stochastic process easier it has been classified into various categories. If the sample space consists of a finite set of numbers or a countable number of elements such as integers or the natural numbers or any real values then it remains in a discrete time. In this article, we will deal with discrete-time stochastic processes. Where H20 and L20 are the highest and lowest prices in the last 20 days.


The term stochastic is used to refer to a randomly determined process that can be analyzed statistically to infer conclusions. One of the most popular uses of stochastic models is in the financial sector and in the stock market. The stochastic oscillator is an important part of technical analysis that can help you determine the price action for an asset such as a stock, a commodity, or even a currency. This indicator is used to identify overbought and oversold trading signals for any asset, thereby enabling you to spot reversals in the price action.

NIFTY – Stochastic Oscillator, Stoch Indicator, Stoch Chart

Stochastics have been around for over 50 years and just like most indicators, they cannot be looked at in a vacuum. “This should be taken into consideration alongside a tested trading strategy and could act as a supplement to the inherent trading decision,” said Kamath. Is a statistician and probabilist with an interest in developing stochastic models and statistical methods for finance, energy markets and weather and environmental variables.


The Stochastic itself is plotted on the assumption that in uptrends the close is usually higher in the range. The same is assumed to be true in downtrending markets, that the close is usually lower than the average range. “KYC is one time exercise while dealing in securities markets – once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.” The stochastic oscillator is a powerful trading tool while used with caution. Avoid making mistakes while using it to predict a trade if you don’t want to lose hundreds and thousands of money.

Stochastic(S) Screener for Indian Stocks from 5 Mins to Monthly Ticks

A reading of 100% shows that the security’s close was the highest price that the security has traded during the preceding x-time periods. There are several ways to define and generalize the homogeneous Poisson process. This stochastic process is also known as the Poisson stationary process because its index set is the real line. If the Poisson process’s parameter constant is replaced with a nonnegative integrable function of t. The resulting process is known as an inhomogeneous or nonhomogeneous Poisson process because the average density of the process’s points is no longer constant. The Poisson process, which is a fundamental process in queueing theory, is an important process for mathematical models, where it finds applications for models of events randomly occurring in certain time windows.

Other types of random walks are defined so that their state spaces can be other mathematical objects, such as lattices and groups, and they are widely studied and used in a variety of disciplines. You can study all the theory of probability and random processes mentioned below in the brief, by referring to the book Essentials of stochastic processes. Oscillators provide good entry and exit signals but generally should be used in conjunction with other technical indicators and trading platforms.

In the 1950s, Dr. George C. Lane developed a technical indicator and named it the stochastic oscillator. Unlike other traditional technical indicators that followed either the price or the volume, the stochastic indicator followed the momentum of the price of an asset. Since the indicator measured the oscillations in the price of an asset, it was referred to by Dr. George Lane as the stochastic oscillator.

  • The indicator puts a major focus on price momentum for a particular asset, and when used right, it can identify both overbought and oversold levels in crypto.
  • Unique to Ambit Stochastics are ambit sets, which allow the delimitation of space-time to a zone of interest, and ambit fields, which are particularly well-adapted to modelling stochastic volatility or intermittency.
  • Stochastics Oscillator is a momentum oscillator that helps to measure the current price in relation to its price range over a period of time.
  • The same can be observed in trading app provided by brokerage firms.
  • Calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin ashi charts, and lines on Kagi charts.

The process is also used as a mathematical model for various random phenomena in a variety of fields, including the majority of natural sciences and some branches of social sciences. Almost certainly, a Wiener process sample path is continuous everywhere but differentiable nowhere. It can be thought of as a continuous variation on the simple random walk. Donsker’s theorem or invariance principle, also known as the functional central limit theorem, is concerned with the mathematical limit of other stochastic processes, such as certain random walks rescaled. Vectors in Euclidean space, implying that they are discrete-time processes. However, some people use the term to refer to processes that change in real-time, such as the Wiener process used in finance, which has caused some confusion and led to criticism.

Be In Charge of Your Financial Destiny

In other words, a slow stochastic is nothing but a three-period average of a fast stochastic. “A close observation will reveal that the %D line of the fast stochastic is equal to the %K line of the slow stochastic,” Mohammad said. ’s research focuses on stochastic analysis and its applications to energy and finance. He has contributed to risk management analysis of financial markets for weather and energy, as well as theoretical developments of stochastic calculus, including non-semimartingale stochastic integration. Recently he has developed stochastic volatility models and autoregressive processes in the infinite dimensional context.


Using this logic, I decided to try using a Stochastic on the existing Stochastic in order to smooth it out – hence the “Double Stochastic”. In case you didn’t know, you can open your account online within 24 hours. If you wish to open your account offline, fill and sign the forms using a black/blue ballpoint pen.

Stochastic Process Definition

Both of these tools are price momentum oscillators that are used widely by traders. To increase the accuracy of a buy or sell signal, traders often use the stochastic oscillator and the RSI in tandem. While the objective of these two technical indicators retail arbitrage definition may be similar, the underlying theories are different. The indicator basically maps the recent price movements to the range in and then tries to assess the whether the price is trading at lower end of the range or the higher end of the range.

These random variables are put together in a set then it is called a stochastic process. For mathematical models used for understanding any phenomenon or system that results from a very random behavior, Stochastic processes are used. Such phenomena can occur anywhere anytime in this constantly active and changing world.

These two lines allow us to use crossovers to put on a trade, but traders necessarily do not use crossovers to initiate trading positions. Stochastics is another popular indicator used by many traders and investors. Two lines plotted below the chart when we plot stochastics indicator. Stochastic oscillator serves the same purpose as other indicators, indicating when an asset price moves to overbought or oversold regions.

Description This indicated is ported from November 2019 issue of TASC. “The Stochastic MACD Oscillator” in this issue, author Vitali Apirine introduces a new indicator created by… This website is using a security service to protect itself from online attacks.

Leave a Comment