Last week we looked at an Adaptive CCI. Now let us look at extending our experiments in creating a adaptive stochastic. As you are aware the stochastic indicator calculates the difference between the current close and the lowest value in a range as a ratio of the entire range. This ratio is converted to a percentage and then a small smoothing is applied.
%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
The Lowest low and Highest High is calculated over a specified look back period. Here we will calculate these values on the Dominant cycle (DC) period. The DC is again calculated using the Hilbert transform of John Ehler. The DC period is a varying parameter depending on the market condition and the Stochastic calculation is automatically adjusted as per the varying DC period making it adaptive to the Market condition.
You can see in the chart below that the adaptive Stochastic is giving less whipsaws and is smoother. The afl is also provided for you to experiment. Do share your finding and thoughts.