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 to measure 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 is generally viewed as superior due to the smoothing effects of the moving averages which equates to less false 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):
As will be shown on the next page, Stochastics offer clear buy and sell signals and help in determining overbought or oversold price conditions.
Next Page - Stochastic Buy & Sell Signals
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