Stochastics

Calculation of Fast and Slow Stoch Stochastics

Once the %K stochastic is obtained, the %D stochastic is arrived at by calculating a short-term moving average of the %K value. One of the most popular periods for the moving average is to use a 3 day moving average of the %K figure to obtain the %D value. We'll see later how the %D and %K interract to produce buying and selling signals when it comes to interpretation of the stochastic indicators.

The above method gives a fast stochastic (or fast stoch) %K and %D value which is very sensitive to price changes and can oscillate quite considerably. This can potentially give a large number of false signals when it comes to interpretation, so, in order to smooth out the oscillating movements, a slow stochastic can be calculated.

The usual way of obtaining the slow stochastic (or slow stoch) is to use a moving average of the fast stochastic's %K and call the result the slow stochastic %K. Effectively, therefore, if a 3 day moving average of the fast stochastic's %K is used to calculate the slow syochastic %K, then the slow stochastic %K ends up as being identical to the fast stochastic's %D value. A 3 day moving average of the fast stochastic's %K is indeed a common period to use, but other periods may be used as an alternative.

Then, once the slow stoch %K value has been determined, the slow stoch %D is obtained by calculating a moving average of the slow stochastic %K (again, a 3 day period is often used to calculate the moving average). Therefore the slow stoch %D ends up as being a moving average of a moving average of the raw fast stochastic %K.

An alternative way of calculating the slow stochastic is used by some analysts: Instead of obtaining the slow stoch by calculating a moving average of the fast stochastic %K, different periods are simply used in the original calculations. For example, one particular online charting service uses a 5 day period of price data to calculate the raw fast stochastic %K, with a 3 day moving average applied to the fast stoch %K to obtain the fast stochastic %D, but uses a 15 day period of price information to calculate the slow stochastic %K, with a 5 day moving average applied to this slow stoch %K to generate the slow stochastic %D.

Whichever method is used, bear in mind that many analysts consider that the slow stochastic can give more reliable results than the fast stoch.

Stochastics Interpretation

If either the %K or %D fall below 20 and then starts to rise again above 20, this may be considered a buy sign. Similarly, a selling signal is thought to occur if the indicator rises above 80 and then begins to fall below 80.