Is a Slow Stochastic Effective in Day Trading?

Considering the hundreds of indicators available for tradersfind the appropriate technical tools to use in transactions of the day can be a difficult task. The good news is that the majority of indicators can be used in day trading by simply adjusting the number of time frames used to create the indicator.

Most traders are used to seeing each indicator use each daily close as a period in the calculation, but they soon forget that the interpretation remains the same whether the data used in a period equals one day, one minute, one week. , a month or a quarter.

The Stochastic Oscillator Formula

An indicator chosen by many traders is how fast or slow stochastic oscillator. It is calculated according to the following formula:
















%

K

=



1







(

VS

P



L

1

4

)



(

H

1

4



L

1

4

)













where:














VS

=

Most recent closing price














L

1

4

=

Low of the previous 14 trading sessions



\begin{aligned} &\%K=\frac{100\ast (CP-L14)}{(H14-L14)}\\ &\textbf{where:}\\ &C= \text{Highest closing price recent} \\ &L14= \text{Lowest of previous 14 trading sessions}\\ &H14 = \text{Highest price traded in the same 14-day period} \end{aligned}


%K=(H14L14)1(VSPL14)where:VS=Most recent closing priceL14=Low of the previous 14 trading sessions

Read More:   Tear Sheets

A %K result of 80 is interpreted to mean that the price of the security closed above 80% of all previous closing prices in the past 14 days. The main assumption is that the price of a security will trade at the high end of the range in a large uptrend. A period of three moving average %K called %D is usually included to act as a signal line. Trade signals are usually emitted when the %K crosses the %D.

Using the Stochastic Oscillator

Typically a 14 day period is used in the calculation above, but this period is often modified by traders make this indicator more or less sensitive to changes in the price of the underlying asset.

In an uptrend market, prices should close near the highs, while in a downtrend, they should close near the lows.

fast or slow

The “speed” of a stochastic oscillator refers to the parameters used for the %D and %K inputs. The result obtained by applying the above formula is known as fast stochastic. Some traders find this indicator too sensitive to price changes, which ultimately leads to being removed from office prematurely. To solve this problem, Slow Stochastics was invented by applying a three-period moving average to the %K of the fast calculation.

  • Quick: the formula is shown above, but using a 3 day moving average (MA) of %K.
  • Slow: replace %K with Fast D% (i.e. the MA of %K); replace D% with a slow MA of K%,

Taking a three-period moving average of the %K of the Fast Stochastic has proven to be an effective way to increase the quality of trade signals; it also reduces the number of fakes crossings. After the first moving average is applied to the %K of the Fast Stochastic, an additional three-period moving average is then applied, which is known as the %D of the Slow Stochastic. Close inspection will reveal that the %K on the Slow Stochastic is the same as the %D (signal line) on the Fast Stochastic.

Read More:   Bounty Definition

Why use Slow Stochastic

The Slow Stochastic is one of the most popular indicators used by day traders because it reduces the risk of entering a position based on a false signal. You can think of a Fast Stochastic as a speedboat; it is nimble and can easily change direction based on sudden market movements. A slow stochastic, on the other handmore like an aircraft carrier, in that it takes more effort to change direction.

In general, a Slow Stochastic measures the relative position of the last closing price against the high and low of the last 14 periods. When using this indicator, the main assumption is that the price of an asset will trade near the high of the range in an uptrend and near the low in a downtrend. This indicator is very effective when used by day traders, but one problem that can arise is that some charting services may not include it as an option on their charts. If this is the case for you, you might want to consider re-evaluating the mapping service you use.

Related Posts