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.