Stochastic Oscillator Indicator

Stochastic Oscillator Indicator: FAST VS. SLOW STOCHASTICS

The formula above is to calculate points on the %K line leads us to a stochastic oscillator that is extremely volatile and, therefore, is often referred to as a "fast" stochastic. Lane realized that due to the fast stochastic's volatility, it was not very useful as a trading tool because it generated frequent and often inaccurate trading signals. In an attempt to create an indicator that was less volatile and, therefore, more useful, Lane created a "slow" stochastic by:

Making the original %D line the new %K line-the stochastic is "smoothed" or slowed by averaging over three points. In other words, the new %K line is a three-point moving average of the fast %K line;
Using a three-point moving average of the original %D line as the slow stochastic's %D line. Therefore, we are taking the original %K line, smoothing or averaging it over three points, and then averaging this line over three points once more.

                    

Figure above illustrates both the fast (upper window) and slow (middle window) stochastics for Global Marine. In both instances, the %K line is the solid line, and the %D line is the dotted line. In both stochastic windows, the two horizontal lines mark the overbought (indicator value above 80) and oversold areas (indicator value below 20) as defined by Lane. As we will see later, the movements of the %K and %D lines above and below these levels are useful when timing your buy and sell decisions. The numbers in parentheses on the chart indicate the number of points used in calculating the moving averages period used. Looking at the slow stochastic in the middle window, you see (5,3) after the %K label. This indicates that the points on the %K line are calculated over five points and then "smoothed," or averaged, over three points. The %D lines in Figure 1 are a threepoint moving averages of their respective %K lines. When comparing the slow and fast stochastics, you can immediately see that the slow stochastic is more rounded and less volatile than the fast stochastic. Note, also, that there are times when the fast stochastic lines either cross above 80 or below 20, while the slow stochastic lines do not. By slowing the lines, the slow stochastic generates fewer trading signals.