A technical momentum indicator that measures the trend in prices and identify trend reversals
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
The slow stochastic indicator is a technical momentum indicator that aims to measure the trend in prices and identify trend reversals. George Lane developed the indicator, which is driven by two parameters – the lookback period and the smoothing parameter.
The lookback period is the period over which the oscillator is calculated, and the smoothing parameter is the number of periods over which the moving average of the oscillator is calculated. It is called an oscillator because the value of the indicator oscillates between 0 and 100. It can be computed as follows:
Where:
C = Current price
L = Period low
H = Period high
%K = The slow oscillator computed as the 3-day simple moving average (SMA) of the fast oscillator
The lookback period is usually 5 days or 14 days, but it can be any number between 5 days and 21 days. The indicator is not effective over longer periods because, over longer periods, stock prices tend to have an upward trend.
There is also a second quantity computed known as %D, which is the 3-day SMA of the %K. It is a smoothed version of the %K. It is computed because %K is a volatile indicator and can lead to spurious signals. A smoothed version (%D) moves much slower than the %K; hence, the signals generated are indicative of a stronger trend.
The Slow Stochastic Oscillator (%K) is a momentum indicator, and it is used to identify the strength of trends in price movements. It can be used to generate overbought and oversold signals. Typically, a stock is considered overbought if the %K is above 80 and oversold if %K is below 20. Other widely used levels are 75 and 25, respectively.
The levels may be used as buy (%K below 20) or sell (%K above 80) to create a simple mechanical trading strategy. In practice, these thresholds are used in combination with other indicators and serve as warning signals.
Step 2: Calculate the Fast Stochastic Oscillator over the desired lookback period (5-21 days). Use the MIN() and MAX() functions to calculate the low price (L) and high price (H), respectively. Compute the Fast %K using the above formula.
Step 3: Compute the 3-day simple moving average of the Fast Stochastic oscillator (Fast %K) to get the Slow %K.
Step 4: Finally, compute the 3-day simple moving average of the Slow %K. It is the Slow %D.
To learn more about George Lane’s trading strategy, check out our article on Fast Stochastic Indicator.
The slow stochastic indicator is a technical momentum indicator that aims to measure the trend in prices and identify trend reversals. George Lane developed the indicator, which is driven by two parameters – the lookback period and the smoothing parameter.
Although the Stochastic Slow tends to produce fewer signals than the fast oscillator, these signals are often found to be more precise. The analysis technique is, however, the same: the crossovers of main plots with overbought/oversold levels are normally looked for.
Stochastic Oscillator 14 3 3 (STOCH) is a range bound momentum oscillator. The Stochastic 14 3 3 indicator is designed to display the location of the close compared to the high/low range over a user defined number of periods.
Both fast and slow stochastics are oscillators that look at the momentum of price changes for a given security. The fast stochastic is agile and changes direction quickly in response to sudden changes.The slow stochastic changes direction more slowly but is less likely to give false signals.
However, the stochastic is more sensitive to price fluctuations and is usually used for short-term trades, while RSI is more effective for long-term trading. Regardless of the signals, traders keep in mind that none of the indicators can be used without other technical analysis tools for confirmation.
Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.
Key Takeaways. Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
The default settings are 5, 3, 3. Other commonly used settings for Stochastics include 14, 3, 3 and 21, 5, 5. Stochastics is often referred to as Fast Stochastics with a setting of 5, 4, Slow Stochastics with a setting of 14, 3 and Full Stochastics with the settings of 14, 3, 3.
The responsive 5-3-3 setting will flip buy and sell cycles frequently, often without the lines reaching overbought or oversold levels. The mid-range 21-7-7 setting will look back at a longer period but keeps smoothing at relatively low levels.
The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods. %D is a 3-day simple moving average of %K.
For OB/OS signals, the Stochastic setting of 14,3,3 works well. The higher the time frame the better, but usually a H4 or a Daily chart is the optimum for day traders and swing traders.
The stochastic oscillator is mainly used to highlight when the price may be overextended and could reverse. In this capacity, it acts as a leading indicator.
This gives the current percentage of the range within the last 14 periods. 3-period %D: A 3-period moving average of the %K value, which smooths out the %K value and makes it more responsive to recent price changes.
The slow stochastic is one of the most popular indicators used by day traders because it reduces the chance of entering a position based on a false signal. You can think of a fast stochastic as a speedboat; it is agile and can easily change directions based on sudden movement in the market.
How to read the stochastic indicator. The stochastic indicator is scaled between 0 and 100. A reading above 80 indicates that the instrument is trading near the top of its high-low range. A reading below 20 signals that the instrument is trading near the bottom of its high-low range.
Key Takeaways. Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
Combining the stochastic oscillator with other technical indicators can help you confirm the signals you receive. Some of the best technical indicators to pair with stochastic are moving average crossovers, moving average convergence divergence (MACD), and relative strength index (RSI).
The indicator itself is also easy to understand and simple to use. The biggest disadvantage is that stochastics perform poorly when the market isn't trending.
The standard number of periods used for measurement is 14. For example, on a daily chart, this will be 14 days. On an hourly chart, this will be 14 hours, etc. The stochastic indicator is a two-line indicator that traders can use on any chart.
Address: 743 Stoltenberg Center, Genovevaville, NJ 59925-3119
Phone: +2202978377583
Job: Administration Engineer
Hobby: Surfing, Sailing, Listening to music, Web surfing, Kitesurfing, Geocaching, Backpacking
Introduction: My name is Rubie Ullrich, I am a enthusiastic, perfect, tender, vivacious, talented, famous, delightful person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
