Slow Stochastic

The Slow Stochastic applies further smoothing to the Stochastic oscillator, to reduce
volatility and improve signal accuracy.
Trading Signals
Trading signals are the same as for the Stochastic oscillator.
Ranging Markets
Signals are listed in order of their importance:
1. Go long on bullish divergence (on %D) where the first trough is below the
Oversold level.
2. Go long when %K or % falls !elow the "versold level and rises !ac# a!ove it.
$. Go long when %K crosses to a!ove %.
Short signals:
1. Go short on bearish divergence (on %D) where the first peak is above the
Overbought level.
2. Go short when %K or % rises a!ove the "ver!ought level then falls !ac# !elow
it.
$. Go short when %K crosses to !elow %.
%lace stop&losses !elow the most recent minor 'ow (or a!ove the most recent minor
)igh* when going long (or short*.
Trending Markets
"nly ta#e signals in the direction of the trend and never go long when Stochastic is
over!ought, nor short when oversold.
The shape of a Stochastic !ottom gives some indication of the ensuing rally. + narrow
!ottom that is not very deep indicates that !ears are wea# and that the following rally
should !e strong. + !road, deep !ottom signals that !ears are strong and that the rally
should !e wea#.
The same applies to Stochastic tops. ,arrow tops indicate that the !ulls are wea# and that
the correction is li#ely to !e severe. )igh, wide tops indicate that !ulls are strong and the
correction is li#ely to !e wea#.
-se trailing !uy& and sell&stops to enter trades and protect yourself with stop&losses.
ong!
.f the Stochastic (%K or %* falls !elow the "versold line, place a trailing !uy stop.
/hen you are stopped in, place a stop loss !elow the 'ow of the recent down&trend (the
lowest 'ow since the signal day*.
Short!
.f Stochastic rises a!ove the "ver!ought line, place a trailing short stop. /hen you are
stopped in, place a stop loss a!ove the )igh of the recent up&trend (the highest )igh since
the signal day*.
"#it!
-se a trend indicator to e0it.
Forex data
10-minute delayed
"#a$ple
1ohnson 2 1ohnson is plotted with a 21 day e0ponential moving average (3+* and 4
day Slow Stochastic with %K and %. "ver!ought5oversold levels are set at
675$7. 8losing price is used as a filter on the 3+.
3ouse over chart captions to display trading signals.
1. The mar#et is trending upwards (price a!ove the 3+*. %K twice crosses to a!ove
97. /ait until the 3+ turns down !efore going short :S;.
2. %K crosses to !elow 27. Go long :'; when the 3+ turns upwards. <0it :=; when
price closes !elow the 3+.
$. %K crosses to !elow 27. Go long :'; when the 3+ turns upwards.
>. %rice has !een fluctuating around the 3+ which indicates that the mar#et is
ranging. +d?ust the trading signals and over!ought5oversold levels.
Go short :S; when %K crosses to !elow % . The trade is stopped out !y a rally
a!ove the last minor )igh.
4. + !earish divergence on % signals to re&instate the short :S; position.
@. %K crosses to a!ove %, signaling to go long :';.
6. %K signals to go short :S; when it crosses !elow %.
9. + !ullish divergence on % signals to go long :';.
A. %K rises a!ove 67 and turns !ac# !elow. Go short :S;.
17. There is a !ullish, triple divergence on %. Go long :';.
11. %K crosses to !elow % . Go short :S;.
12. Go long :'; when %K crosses to a!ove %. The mar#et is still ranging, with
price fluctuating around the 3+.
Bemem!er that the days shown are the signal days and that trades are only entered on the
following day. Ta#e a loo# at the e0it :=; from :2;. +d?usting Stop 'evels may provide
faster e0its.
Setup
See .ndicator %anel for directions on how to set up an indicator. The default Slow
Stochastic settings are:
%K & 4 days
%K slowing periods & $ days
% & $ days
+ll are simple moving averages
over!ought level & 67%
oversold level & $7%
To alter default settings & see <dit .ndicator Settings.
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%or$ula
To calculate the Stochastic "scillator:
1. The first step is to decide on the num!er of periods (%K Periods* to !e included
in the calculation. The norm is 4 days, !ut this should !e !ased on the time frame
that you are analyCing.
2. Then calculate %K, !y comparing the latest 8losing price to the range traded over
the selected period:
& ' &lose (toda)* + owest ow (in %K Periods*
, ',ighest ,igh (in %K Periods* + owest ow (in %K Periods*
%- ' & . , /011
$. 8alculate % !y smoothing %K. The original formula used a $ period simple
moving average, !ut this can !e varied, !ased on the time frame that you are
analyCing.
Slow Stochastic Oscillator
3any traders find the Stochastic "scillator too volatile and prefer to use the Slow
Stochastic:
1. The %K :Slow; is eDual to the % :East; from the a!ove formula.
2. The % :Slow; is calculated !y smoothing %K :Slow;. This is normally done
using a further $ period simple moving average.