How To Trade Slow Stochastic Tutorial
Created by way of George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that tells us the spot of the present close in relation to the high/low range over a definite number of periods.
George Lane M.D. (1921 to 2004) was a Doctor of Medicine, securities trader, writer, teacher, and technical analyst. He created and hyped the Stochastic Oscillator, which is one of the foundational indicators used nowadays amongst 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 imperative, the momentum changes direction before price. Therefore, the Stochastic Oscillator can be used to recognize bullish and bearish divergences to foreshadow reversals.
I choose to trade the Slow Stochastic because it’s more smoothed out than the Fast Stochastic giving less head fakes.
A difference between Fast Stochastics and Slow Stochastics is only a moving average. When calculating 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. Yes you read that correctly, a moving average of the moving average. Do not ponder that too much.
That slows down the movement of the indicator, and so the name of Slow Stochastics. By slowing the movement of the indicator down, we will see fewer signals to buy or sell on the chart, although they ought to be more correct signals.
Like you can see in the image above, the Slow Stochastic gives fewer buy and sell signals although they are more accurate.
The settings I like to use for the Slow Stochastics depends on the market or stock I am trading. I sometimes get a giggle out of investors who try and use a one size fits all tactic. I say use the potential of modern day computers and more superior charting tools like Market Club that offer a real time java interface that lets you change the settings in real time. Simply grab the slider and adjust the settings so that the signals are smoothed out with less head fakes, and that matches your stock trading style (buy and hold, swing trade, day trade, etc).
Also keep the type of Stochastic signal you are looking to either buy or sell as flexible also. For example, you could 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 could uncover that for the stock you are trading that a cross of the signal line and the %D line is a smarter buy signal while a good sell signal is when the signal line moves above 80 for a day or two and then crosses under the 80 line. You may discover that bullish divergences are better trade signals for particular stocks and markets. For instance, go long when the stock price makes a big low but the Stochastic traces a shallower low.
Remember, every stock and market has its own personality at different times of the year because that persona is a reflection of the collective human psychology of all the stock traders who are trading that specific market at a specific time of year. Learn to modify your Stochastic to the market you are trading and to your own trading method, and watch the money start to pour in.
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