AS developed by George Lane, The slow stochastic indicator guides the traders in making informed decisions while in the market by comparing security closing prices over a determined time. With the indicator, an investor is able to understand the market better and determine when to make a move in the market. Traders have many choices when choosing an indicator, but the Stochastic indicator is more efficient on a broader trading period space. Traders use 0 to 100 values in the determination of their decisions when trading.
Features of the slow stochastic indicator
- Look back period
- Smoothing parameter
- Trend in prices
Determination of the stochastic indicator
It is computed using three components that constitute its application. The components include: (Click this link to access an economic calendar for your trading strategies )
Slow %K computed as follows:
(recent close-lowest low(n)) divide (highest high(n)- (lowest low(n))
After computing %K, calculate three periods of SMA
Slow %D is the same as 3-period SMA of %k
There are no specific periods when computing indicators, meaning you decide the periods to use, but the default is 14.
Interpretation of the Indicator
Every investor craves to have a clear understanding of any indicator so that they are efficiently applied. The indicator is direct and straightforward, which is very easy to set and read the market fluctuations under review. With a value reading, more than 80% and the oscillator draws back to the area below 80; it’s an overbought area. On the other hand, a signal of the operator going below 20 and then above 20 is a buy call.
In the event the two lines cut each other in the oversold or overbought region, a crossover signal is generated. A decreasing %K cuts %D from below in the overbought territory communicates it’s the selling time. On the other hand, if an increasing %k cuts %D from the higher region in the oversold area, it is the buying time.
If there is no new low or high report, a divergence is formed. In case the price picks a lower low, and the indicator generates a higher low, it is a bullish divergence prevails.
Divergences are created by a new high or low in price not being registered. A lower low in price and a higher low by the indicator form a bullish divergence. In cases where the price adopts a new higher high, and the indicator creates a lower high, it’s an indication of an upcoming bearish reversal.Stochastic Slow Strategy Indicator | Indicator Series Click To Tweet
Application of the Indicator?
Many traders commonly use the indicator because it has a lower probability of entering a market after being misguided by a false signal. It reacts very fast in the market, which means that any sudden movement in the market causes an instant change in direction
Difference Between the Slow Stochastics and the RSI
Stochastic indicator pays more emphasis on the highs and the lows over a predetermined period of time while RSI, which still uses the 14 periods as a default pays more attention to the highest gain in percentage and the lowest percentage gain over the set periods.
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