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Stochastics

I am totally confused on stochastics and am requesting some help in undrstanding them. I dont understand the difference between between slow, fast and full stochastics and how and when to utilize them.

It's all a blur to me now. I have read articles in sc.com and it is not helping. Any suggestions?

Answers

  • markdmarkd mod
    edited February 26
    Fast Stochastics was the original. It took the high the low of the specified number of days and then calculated where price was in that range. It expressed the location of the current close as a per cent of the range. That value was called %K (for no good reason, except it needed a name and there is a "K" sound in Stochastics).

    So if the high was 20 and the low was 10, the range was 10 points. If the price was 15, price was at the 50 per cent level (so, K = 5 points off the bottom/10 points in the range = .50, or 50 per cent). If price was 11, it was at the 10 per cent level (1/10 = .10). If price was 17, it was at the 70 per cent level. And so on.

    Some people use the 20 per cent level and 80 per cent level as signals. If K goes below the 20 per cent level then back above it again, that is a buy signal. If K goes above 80 then below, that is a sell signal.

    Other people thought a "signal line" was a good idea. A signal line is a moving average of K. For no good reason, the signal line is called %D. With a signal line, if K crosses above the signal line D, that's a buy. If it crosses below, that's a sell.

    That worked fine for some people. Other people thought there were too many whipsaws because K moved "too fast". So they came up with "slow" stochastics by making D the new K. So original K, which jumped around a lot doesn't show up at all in Slow Stochastics. Instead, the D in Fast became the new K in Slow. Then they added a moving average of the new K and called it - what else - %D.

    The thing about the Slow Stochastic is, Slow K is ALWAYS a three day average of the K from Fast Stochastics. But some people think three days is either too long or too short. So Full Stochastics lets you choose how long you want the moving average of Fast K to be. That's the only difference between Slow and Full - you get a choice about the MA for K.

    So, in Fast Stochastics, there are two parameters. The first is the look back period for the highest high and the lowest low needed to calculate K, say 14 days, and the second is the length of the moving average you want to calculate the signal line, D. That can be any number you want, but the default was always 3.

    In Slow Stochastics, the first parameter is also the look back period for K, and the second parameter is also the length of the moving average for the signal line D. The difference is, in Slow Stockastics, K is the three day average of Fast K, and there is nothing you can do about it.

    Full Stochastics has not two, but THREE parameters. The first is the look back period, just like the other two. The SECOND is the moving average to create %K. In Slow, that number was the built in 3, but with Full, you can choose any other number and this second parameter is the place to do it. Then, the third parameter is for the length of the moving average to calculate D.

    There is no right or wrong about using any of them. You just have to experiment with them to see which combination of indicator and parameters works best for you. I prefer to keep it very simple. Nothing works all the time any way. Any combination will be better for some stocks than others until the market changes and then a different combination works better. But see Joanne Klein's public chart list Above the Green Line for an interesting non-standard use of Fast Stochastics.
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