Stochastic Definition & Meaning

In statistics, the word stochastic refers to something that is subject to a probability distribution, such as a random variable. In trading, the use of this term is meant to indicate that the current price of a security can be related to a range of possible outcomes, or relative to its price range over some time period. The stochastic oscillator represents recent prices on a scale of 0 to 100, with 0 representing the lower limits of the recent time period and 100 representing the upper limit.

In other words, the RSI was designed to measure the speed of price movements, while the stochastic oscillator formula works best in consistent trading ranges. Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold. However, these are not always indicative of impending reversal; very strong trends can maintain overbought or oversold conditions for an extended period. Instead, traders should look to changes in the stochastic oscillator for clues about future trend shifts. Deterministic modeling gives you the same exact results for a particular set of inputs, no matter how many times you re-calculate the model. None of them is random, and there is only one set of specific values and only one answer or solution to a problem.

Meanwhile, StochRSI is derivative of RSI itself, or a second derivative of price. StochRSI moves very quickly from overbought to oversold, or vice versa, while the RSI is a much slower moving indicator. One isn’t better than the other, StochRSI just moves more (and more quickly) than the RSI.

  1. They seem similar, but the StochRSI relies on a different formula from what generates RSI values.
  2. The standard time period used is 14 days, though this can be adjusted to meet specific analytical needs.
  3. The StochRSI was developed by Tushar S. Chande and Stanley Kroll and detailed in their book “The New Technical Trader,” first published in 1994.
  4. These models are then used by quantitative analysts to value options on stock prices, bond prices, and on interest rates, see Markov models.
  5. Stochastic models are all about calculating and predicting an outcome based on volatility and variability; the more variation in a stochastic model is reflected in the number of input variables.

The investor needs to watch as the D line and the price of the issue begin to change and move into either the overbought (over the 80 line) or the oversold (under the 20 line) positions. The investor needs to consider selling the stock when the indicator moves above the 80 levels. Conversely, the investor needs to consider buying an issue that is below the 20 line and is starting to move up with increased volume. Today’s charting software does all the calculations, stochastic dictionary making the whole technical analysis process so much easier, and thus, more exciting for the average investor. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional.

What Is Stochastic Modeling?

A stochastic model incorporates random variables to produce many different outcomes under diverse conditions. On a stochastic oscillator chart, %D represents the 3-period average of %K. This line is used to show the longer-term trend for current prices, and is used to show the current price trend is continuing for a sustained period of time. Meanwhile, the RSI tracks overbought and oversold levels by measuring the velocity of price movements.

Meaning of stochastic in English

The term refers to the process of determination being random, regardless of any particular outcome. Flipping a fair coin that lands heads 100 times in a row (in practice, impossibly unlikely, or proof that the coin is not a fair one) could still be contemplated as the outcome of a stochastic procedure. We are no strangers, alas, to significant spikes in search for stochastic terrorism. The term trended up over 9,000% last October on amid discussion of the news that bombs were being mailed to Democratic leaders. Among other instances, Kayyem notably used the term stochastic terrorism on Twitter, on CNN, and in an op-ed for the Washington Post to discuss the El Paso shooter, President Donald Trump, and white supremacy.

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘stochastic.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. The K line is faster than the D line; the D line is the slower of the two.

Measure theory and probability theory

Search interest in stochastic terrorism appears to have been influenced by Juliette Kayyem, who previously served in the Department of Homeland Security as Assistant Secretary for Intergovernmental Affairs. This same approach is used in the service industry where parameters are replaced by processes related to service level agreements.

Stochastic music was pioneered by Iannis Xenakis, who coined the term stochastic music. Earlier, John Cage and others had composed aleatoric or indeterminate music, which is created by chance processes but does not have the strict mathematical basis (Cage’s Music of Changes, for example, uses a system of charts based on the I-Ching). Lejaren Hiller and Leonard Issacson used generative grammars and Markov chains in their 1957 Illiac Suite. Modern electronic music production techniques make these processes relatively simple to implement, and many hardware devices such as synthesizers and drum machines incorporate randomization features. Generative music techniques are therefore readily accessible to composers, performers, and producers. This assumption is largely valid for either continuous or batch manufacturing processes.

For example, when a bearish trend reaches a new lower low, but the oscillator prints a higher low, it may be an indicator that bears are exhausting their momentum and a bullish reversal is brewing. We observed lookups for one term, stochastic terrorism, surge 63,389% on August 4, as compared to the week prior. These models are then used by quantitative analysts to value options on stock prices, bond prices, and on interest rates, see Markov models. In other words, its output is two steps away from the actual price of the asset being analyzed, which means at times it may be out of sync with an asset’s market price in real time. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme highs and could be used to signal a pullback in the underlying security. The sense in statistics of “randomly determined, based on the theory of probability” is by 1923 (in stochastical), from German stochastik (1917).

Stochastic RSI -StochRSI Definition

Testing and monitoring of the process is recorded using a process control chart which plots a given process control parameter over time. Statistical models are used to define limit lines which define when corrective actions must be taken to bring the process back to its intended operational window. Stochastic modeling is a form of financial model that is used to help make investment decisions. This type of modeling forecasts the probability of various outcomes under different conditions, using random variables. By comparing the current price to the range over time, the stochastic oscillator reflects the consistency with which the price closes near its recent high or low.

A stochastic indicator reading above 80 indicates that the asset is trading near the top of its range, and a reading below 20 shows that it is near the bottom of its range. A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Stochastic process, in probability theory, a process involving the operation of chance. For example, in radioactive decay every atom is subject to a fixed probability of breaking down in any given time interval. More generally, a stochastic process refers to a family of random variables indexed against some other variable or set of variables.

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