Brought into this world by way of George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum guide that shows the position of the current close relative to the high/low range over a specific number of periods.
George Lane M.D. (1921 to 2004) was a Doctor of Medicine, securities trader, author, educator, and technical analyst. He made and hyped the Stochastic Oscillator, which is one of the fundamental technical indicators used in the present day among technical analysts.
Word on the street from an interview with Lane, the Stochastic Oscillator doesn’t follow price, it doesn’t follow volume or whatever thing like that. It follows the speed or the momentum of price. As a law, the momentum changes direction before price. Thus, the Stochastic Oscillator can be used to identify bullish and bearish divergences to foreshadow reversals.
I prefer to trade the Slow Stochastic for the reason that it is more smoothed out than the Fast Stochastic giving less head fakes.
A discrepancy between Fast Stochastics and Slow Stochastics is only a moving average. When working with the Fast Stochastics using the values of 5 and 5, the first 5 is the raw value for Stochastics, while the second 5 is a 5-period moving average of the first 5. When using Slow Stochastics, the first two 5′s are the same as with the Fast Stochastics, with the third 5 being a moving average of the second 5. You are not having an LSD hallucination, that is correct, a moving average of a moving average. Don’t ponder that too much.
That slows down the movement of the indicator, consequently the name of Slow Stochastics. By slowing the movement of the indicator down, we will notice a smaller number of signals to buy or sell on the stock chart, but they ought to be more dependable signals to trade for profit.
Like you can check out in the illustration above, the Slow Stochastic provides fewer buy and sell signals but they are more correct.
The settings I like to use for the Slow Stochastics depends on the market or stock I am looking at. I constantly get a laugh out of investors which try and use a one size fits all method. I say use the potential of present day computers and network with people like the # 3 ranked trader out of 10,480 traders.
Moreover keep the kind of Stochastic signal you are planning to either buy or sell as adaptable also. For instance, you may find that the signal line breaking above the 20 line is a good buy indicator, where a good sell indicator is the signal line breaking below the %D line. You may possibly see that for the market you are in that a cross of the signal line and the %D line is a better buy signal while a sound sell signal is at the time the signal line extends above 80 for a day or two and then breaks under the 80 line. You may perhaps uncover that bullish divergences are better trade signals for particular stocks and markets. For example, go long when the stock price makes a good low but the Stochastic draws a shallower low.
Bear in mind, every stock and market has its own personality at different times of the year because that personality is a likeness of the combined human psychology of all the stock traders who are trading that exact market at a specific time of year. Learn to modify your Stochastic to the market you are trading and to your own trading style, and watch the profits start to pour in.