Stochastic Fast plots the location of the current price in relation to the range of a certain number of prior bars (dependent upon user-input, usually 14-periods). In general, stochastics are used in an attempt to uncover overbought and oversold conditions. Above 80 is generally considered overbought and below 20 is considered oversold. The inputs to Stochastic Fast are as follows:
- Fast %K: [(Close - Low) / (High - Low)] x 100
- Fast %D: Simple moving average of Fast K (usually 3-period moving average)
Stochastic Slow is similar in calculation and interpretation to Stochastic Fast. The difference is listed below:
- Slow %K: Equal to Fast %D (i.e. 3-period moving average of Fast %K)
- Slow %D: A moving average (again, usually 3-period) of Slow %K
The Stochastic Slow might be viewed as superior due to the smoothing effects of the moving averages which equates to less false potential buy and sell signals. A comparison of the two stochastics, fast and slow, is shown below in the chart of the Nasdaq 100 ETF (QQQQ):
The next pages discuss possible buy and sell signals and how stochastics may outline areas of overbought or oversold price conditions.
Next Page - Stochastic Potential Buy & Sell Signals
The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. OnlineTradingConcepts.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.