What’s the difference between fast and slow stochastic oscillators?

[Brian Hayslip]

[Sheila Olson]

Stochastics are used to identify points at which a security becomes overbought or oversold. They plot the current price in relation to a specified range of prior prices. The stochastic oscillator is range-bound, meaning it will only ever range between 0 and 100, with readings below 20 indicating oversold and over 80 suggesting overbought conditions. Traders who use stochastics say the difference between the fast and slow stochastic is a matter of sensitivity, with the fast stochastic being far more responsive to price signals. A look at the calculations might help explain this more clearly. Fast %K: [(Close – Low) / (High – Low)] x 100 Fast %D: SMA of Fast K (generally 3-period MA) The fast stochastic tends to produce a lot of signals, not all of them reliable. Now look at the slow stochastic equation— Slow %K = Fast %D (3-period moving average of Fast %K) Slow %D: MA (typically 3-period) of Slow %K The slow stochastic operates as a smoothing agent on the fast stochastic, eliminating many of the false signals. For this reason, many traders view the slow stochastic as a more reliable indicator. As you can see in the chart below, the slow stochastic is quite smooth compared to the jagged peaks and valleys of the fast stochastic.

 

In some cases, full stochastics are a better choice to adjust the smoothing of the %K line. The slow stochastic only smooths %D, but full stochastics adds a second moving average to %K. In the chart below, full stochastics were added underneath the fast and slow stochastics, with the smoothing MA set to 5 days and further cutting down on signal noise.

 

You can use the %K and %D (fast and slow) stochastic oscillators to generate buy and sell signals. The easiest is to identify crossovers between them; a buy signal exists when %K crosses %D in an upward trajectory, and a sell is generated when it crosses on a downward trajectory. Another way to use stochastics is to look for bullish and bearish divergence to predict a reversal. In that situation, it’s still a good idea to wait for the 80 or 20 signal to confirm the trend. Stochastics are favored by both novice and experienced technical traders because they are quite accurate, and signals are easily identified. Whether to choose fast, slow, or full is more a matter of personal preference, although if you’re day-trading, the slow stochastic is less susceptible to false signals.

[Philip]

Stochastic oscillators are momentum pointers used to examine a commodity’s closing price against its range over a particular duration. The oscillators stretch from 0-100 with figures below 20 showing oversold and above 80 indicating overbought positions. Prices are likely to close next to previous highs in bullish conditions and next to their lows in bearish markets. Sensitivity is what distinguishes fast stochastic oscillators from their slow alternatives. Because they’re more receptive to the underlying asset prices, fast stochastic oscillators experience more transaction signals than slow stochastic oscillators. Suppose the fast stochastic is a race car while the slow stochastic is a limo. Like the race car, fast stochastic boasts of agility and quick direction changes. On the other hand, slow stochastic takes a while to turn but maintains a smooth ride.

[Caroline]

 

Stochastic oscillators compare a stock’s closing value to a specified period’s range. Responsiveness differentiates fast oscillators from slow ones. Therefore, fast stochastics have quicker price-action responses than slow alternatives; a feature that makes them popular among short-term investors.

Instead of predicting trends, oscillators show momentum according to price action. This means a trader will spot a trend first before using the stochastic to schedule their market arrival. Stochastics rely on the principle of uptrends closing next to their highs and downtrends next to their lows.

Hence, they’re illustrated on a chart as two lines with the %D side marking slow stochastics and the %K line marking fast stochastics. With 0-100 values, readings past 80 hint at overbought areas while those under 20 signal oversold zones.

Typically, the %K line is the first to change direction followed by the %D line. If the %D line initiates the shift, however, a slow but steady swing is indicated. Likewise, a strong move is in progress when the signal hits the 0 or 100 extremes.