Stochastic Oscillator - Slow and Fast

Summary

The Stochastic Oscillator was introduced by George Lane and it is a combination of two lines – the %K and the %D – that fluctuate in the range of 0 and 100. The %K line, also known as Stochastic Fast, shows the change to the closing price compared to the price range of a specified period, while the %D line, also known as Stochastic Slow, is the Simple Moving Average (SMA) of the %K line over another specified period. %K line is illustrated as a solid line and %D line as a dotted line. The basic assumption supporting the Stochastic Oscillator is that for days following an upward trend, the closing price is closer to the high end of the day’s price range. Similarly days following a downward trend, the closing price is closer to the low end of the day’s price range.

Note that the Stochastic Slow provides less false signals due to the smoothing effects of the simple moving averages.

Calculation
Fast %K = Closing price - Lowest (K)
Highest (K)
x 100
%D = SMA(%K, N)

where,


Lowest (K) is the lowest price in K periods

Highest (K) is the highest price in K periods

SMA is the Simple Moving Average

N is the smoothing period

Lane suggested periods: K=14 days, N=3 days

Signals

%K values closer to 100% can be interpreted as overbought while values closer to 0% can be interpreted as oversold. A strong sell signal is initiated when the oscillator initially reaches 80% and then a negative divergence occurs driving the oscillator below 80%. Similarly a strong buy signal occurs when the oscillator initially reaches 20% and then a positive divergence drives the value above 20%.

Also a buy signal is triggered when the %K line crosses above the %D line and sell signal is triggered when the %K line crosses below the %D line.



Streamster Stochastic Fast


Streamster Stochastic Slow