Since its invention and development in 1950s, it has helped traders and investors trade smartly and profitably by studying the changes in trends.
It is a technical indicator that allows comparing a security’s closing value to its range of price over a specified duration.
The sensitivity of this indicator to movements of the market can be lowered or reduced by factoring in the time or simply by taking a simple moving average of result.
The Stochastic Oscillator relies on two lines – the Fast %K and Slow %D.
%K typically uses a time period of 15, 10 and 5 days, while %D uses the simple moving average of %K over a period of 3 or 5 days.
Both the lines appear under the stock chart with the key points being the intersection points of these two lines.
If the fast line pierces the slow line to the upside, then it is considered to be a bullish move.
However, if the opposite is true, it is interpreted bearishly.
Most charting software allows you to overlay two Stochastics – Slow and Fast.
This should not be confused with fast %K and slow %D. Both Slow and Fast Stochastics contain %K and %D.
The major difference between these two are that Slow Stochastic use longer trading periods for %K and %D.
As a result it has lower number of intersections and might be too conservative.
However, Fast Stochastic has more intersections and might be too aggressive.
The slow Stochastic Oscillator uses 15 days for %K and 5 days for %D. whereas, on the other hand, the fast one uses 5 days for %K and 3 days for %D.
The underlying theory of this oscillator is, in an upward trending market, prices are likely to close near high and during a downward-trending market, the opposite occurs.
The intersection points between %K and %D marks the transaction signals.
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