Stephen J. Klinger invented the KO. Mr. Klinger set out to build a volume-based indicator to aid in both short- and long-term analysis after learning from previous volume studies by well-known specialists such as Joseph Granville, Larry Williams, and Marc Chaikin. The KO oscillator is a trading indicator that uses both price and volume to suggest potential longer-term market trend turning points. George C Lane invented the SO in the late 1950s. His concept was founded on the premise that market momentum shifts significantly more quickly than volume or price changes.
What is the KO?
The KO is a financial tool that forecasts long-term money flow trends while also recognizing short-term changes. Furthermore, it anticipates price reversals in a financial market by comparing volume to price comprehensively. The volume of a security is the number of units traded per unit of time. The KO is based on the concept of force volume, which includes volume, price trends, and temp (a series of if/then statements that include volume/price).
How KO is used
The indicator, like most oscillators, is based on variations between two specified Exponential Moving Averages (EMA). EMA is a statistical technique that is used to examine current data points by generating averages from a sequence of data. The EMA of both price and volume is measured using the KO. When a shorter EMA (shorter time periods) has a higher value than a larger EMA (longer time periods), it indicates that the price of an asset is rising.
In contrast, when a higher EMA outperforms a shorter EMA, it indicates that the price of a given investment is in a downturn. The KO’s default settings measure a 34-period EMA (a shorter EMA) and a 55-period EMA (a longer EMA). Aside from EMAs, the KO employs volume force to calculate the number of units of securities, open/closing prices, and if/then expressions. The oscillator compares the EMAs of price and volume of a certain investment to determine long-term money flow trends.
How to trade using KO
The KO is made up of a centerline and two colored lines, one blue and one red. The red line is known as the “Klinger,” while the blue line is known as the “signal.” When the blue and red lines cross over one another or the centerline, they determine buy and sell signals.
When the red and blue lines cross beneath the centerline, a buy signal is produced. When a buy signal appears, it is likely that an investor would buy because they expect the price of a given security to rise.
When the red and blue lines cross above the centerline, a sell signal is created. When a sell signal appears, it is likely that an investor will sell since they expect the security’s price trend to deteriorate.
What is the SO?
The Stochastic Oscillator is a technical indicator that compares a security’s most recent closing price to its highest and lowest prices over a given time period. It provides measurements that fluctuate between zero and 100 to the security’s momentum.
The stochastic readings are percentage expressions of the trading range of securities over a specific time period. A reading of 0 represents the trading range’s lowest point. A reading of 100 represents the highest point during the specified time period.
Advantages of SO over KO
The advantages of SO over KO is in the divergence and crossover and how traders use them during trading.
Divergence in SO indicator
Divergence happens when the price of an asset makes a new high or low that is not indicated on the SO. For example, if the price rises to a new high, the oscillator does not move to a new high reading. This is an example of bearish divergence, which may indicate that the market is about to reverse from an uptrend to a decline. The oscillator’s inability to reach a new high along with the price movement shows that the momentum of the uptrend is beginning to weaken.
Bullish divergence happens when the asset makes a new low but the oscillator does not do so as well by going to a new low reading. Bullish divergence suggests an impending market turnaround to the upside.
The drawback of KO in divergence
In terms of divergence, the KO’s drawback is that it may occur too early, resulting in substantial missing parts of a trend. Sometimes the divergence of the oscillator fails to predict the price reversal at all. However, this is to be expected given that divergence is not a trustworthy instrument for predicting probable price reversals.
In the SO indicator, the point at which the fast stochastic line and the slow stochastic line overlap is referred to as a crossover. The 0%K line is the fast stochastic line, while the percent D line is the slow stochastic line. It is a bullish circumstance when the %K line connects and exceeds the percent D line. In contrast, a crossover of the %K line from above to below the %D stochastic line indicates a bearish sell signal.
The drawback of KO in crossovers
Signal line crossovers happen all the time. Because of the frequency, the KO has a difficult time filtering out the worthwhile crossovers. In addition to frequency, zero-line crossings may cause problems with long-term price direction, causing the indicator to miss trading opportunities.
Combining KO and SO
The KO and SO indicators can be combined to increase accuracy during trading. The KO formula can be strengthened by using the SO indicator. If the KO line exceeds its 13-period SMA, you open a spot, but only if the SO sends a signal in the same direction (overbought or oversold). You close the position if the KO crosses its EMA in the opposite direction, but only if the SO delivers a signal that is contrary to your position.
The SO indicator is a momentum indicator that compares the most recent closing price to the preceding trading range over time. Unlike KO, it tracks the market’s speed and momentum rather than price or volume. SO is a better alternative to KO when it comes to divergence and crossovers, as discussed. Combining both tools yields more accurate signals.