The Ehlers' Stochastic study is a modified version of the Stochastic oscillator with application of the Roofing Filter developed by John F. Ehlers, based on aerospace analog filters. This filter aims at reducing noise in price data, which appears to be stronger as the high-to-low price swings increase especially when chart is plotted for greater time intervals. The Stochastic oscillator itself as calculated by this study is difference between the Close price and its lowest value on the specified period normalized to the difference between the highest and the lowest Close on that period. In order to eliminate noise and spectral dilation, this mechanism, however, is applied to price smoothed with Roofing Filter which only passes those wave components whose cycles are between 10 and 48 bars. The period of 10 bars is a default maximum value for a wave cycle to be considered noise; it can be customized via input parameters.

Ehlers' Stochastic oscillator is analyzed in relation to overbought and oversold levels, with two modes of analysis: conventional and predictive. In conventional mode, a Buy signal is indicated when Ehler's Stochastic crosses above the oversold level and a Sell signal is shown when it crosses below the overbought level. For the predictive mode, crossover directions are inverse: Buy signal is issued when the Stochastic plot crosses below the oversold level and Sell signal is shown when it crosses above the overbought level.

Input Parameters

Parameter Description
price The price to which the filter is applied.
length The period upon which the highest and the lowest values of the price are found.
cutoff length Maximum period for a wave cycle to be considered noise.
over bought Defines the overbought level.
over sold Defines the oversold level.
mode Defines whether the conventional or the predictive mode will be used.


Plot Description
Stochastic The Ehlers' Stochastic plot.
OverBought The overbought level.
OverSold The oversold level.
Buy The Buy signal plot.
Sell The Sell signal plot.

Further Reading

1. "Predictive Indicators for Effective Trading Strategies" by John F. Ehlers. Technical Analysis of Stocks & Commodities, January 2014.


*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.

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