What Is 'Worden Stochastics'

The Worden Stochastics indicator represents the percentile rank of the most recent closing price compared to all of the other closing values over a specific timeframe. Traders use the indicator to determine if a particular security is overbought or oversold.

Breaking Down 'Worden Stochastics'

The Worden Stochastics indicator was designed by Peter Worden to recognize a new trading range more quickly than traditional stochastics​. Unlike traditional stochastics that incorporate high, low, and closing prices, the Worden Stochastics indicator uses rankings to avoid over-weighting in outlier periods, providing a potentially more accurate indication of the trading range.

The Worden Stochastics is calculated using the equation: (100 / n – 1) (Rank). N represents the number of closing values in the range, while Rank represents the position of the closing price on a list that’s sorted in ascending order by value.

All stochastic indicators, including Worden Stochastics, measure the level of the close relative to the range over a period of time. Traders use these readings to determine if a particular security is potentially trading at overbought or oversold levels. In addition, traders may look for bullish or bearish divergences between the security’s price and stochastics trends, particularly if they break through the indicator panel's midpoint.

In general, prices trading at the high end of a range are considered overbought, while prices at the low end of a range are considered oversold. However, traders should try to confirm these sentiments with other technical indicators or chart patterns.

Worden Stochastics Example

 

This Worden Stochastics example utilizes 12,3,5 default settings, carving three complete Disney buy and sell cycles over a 4-month period. It reverses at the oversold level in April, but price continues to chop sideways to lower in quiet price action. The indicator dips lower in early May, posting a double bottom reversal that translates into a rally wave lasting nearly three weeks. A mid-May crossover initiates a new sell cycle, perfectly matched by price pulling back to test new support near 105.

The indicator turns higher in early June and price responds with a rally thrust that posts a new high. The next bearish crossover occurs on a reversal day that yields a pullback into late June. A bullish crossover at that time fails to lift price until the indicator reaches the overbought level when the trend gathers strength, generating a sideways oscillation typical in trending securities.

An early August peak ends the advance, giving way to a decline that drops Worden Stochastics through the overbought line for the first time since early July. Price responds with a 5-day decline.

RELATED TERMS
  1. Stochastic Volatility - SV

    Stochastic volatility refers to the fact that the volatility ...
  2. Stochastic Oscillator

    A stochastic oscillator is a technical momentum indicator that ...
  3. Williams %R

    Williams %R is a momentum indicator in technical analysis that ...
  4. Signal Line

    Signal lines are used in technical indicators, especially oscillators, ...
  5. Oversold

    Oversold refers to a security that is trading below the true ...
  6. Crossover

    A crossover is the point on a stock chart when a security and ...
Related Articles
  1. Investing

    Stochastics: An accurate buy and sell indicator

    Stochastics measure the relationship between an issue's closing price and its price range over a predetermined period of time.
  2. Investing

    Fidelity Investments: U.S. Stocks May Be Close to a Buy

    Looking for a sign that it may be time to get back in stocks, Fidelity points to the stochastics charting indicator.
  3. Trading

    4 Double-Cross Buy Signs

    Will the double crossover on MACD and Stochastic indicators trigger a move higher?
  4. Trading

    Buy Weakness On These S&P 500 Leaders

    Just three of the 100 strongest S&P 500 components have dropped toward oversold technical levels, offering potential buying opportunities on crossovers.
  5. Trading

    3 Nasdaq-100 Stocks at or Near Monthly Buy Signals

    Monthly Stochastics crossovers identify significant turning points where shareholder supply and demand can shift forcefully.
  6. Trading

    Gauging Entry and Exit Signals With Range Bars

    Price bars often generate important signals that traders can use for timely entry or exit.
  7. Trading

    Premier Stochastic Oscillator Explained

    This oscillator has been used since the 1950s to anticipate where the market may change direction.
RELATED FAQS
  1. What is the difference between fast and slow stochastics in technical analysis?

    The main difference between fast stochastics and slow stochastics can be summed up in one word: sensitivity. Read Answer >>
  2. How do I read and interpret an Stochastic Oscillator?

    Understand the basics of the stochastic oscillator and how analysts and traders use this measure of trend momentum to predicts ... Read Answer >>
  3. Is a Slow Stochastic Effective in Day Trading?

    The good news is that most technical indicators can be adjusted to be of value to a day trader. Read Answer >>
  4. What are the best technical indicators to complement the Stochastic Oscillator?

    Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
  5. What technical tools can I use to measure momentum?

    Traders use tools such as MACD, stochastics, rate of change and RSI to measure the strength of an asset's momentum and the ... Read Answer >>
  6. What Technical Indicators Best Complement RSI?

    Learn some of the best momentum technical indicators that can be used along with the relative strength index to anticipate ... Read Answer >>
Trading Center