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Trade Slow Stochastic And Become Rich
Made via George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum gauge that tells us the location of the current close compared to the high/low range over a certain number of periods.
George Lane M.D. (1921 to 2004) was a Medical Doctor, securities trader, novelist, teacher, and technical analyst. He created and hyped the Stochastic Oscillator, which is one of the core technical indicators used today amid technical analysts.
Word on the street from an interview with Lane, the Stochastic Oscillator doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a decree, the momentum changes direction before price. As such, the Stochastic Oscillator can be used to detect bullish and bearish divergences to foreshadow reversals.
I have a preference to trade the Slow Stochastic as it's more smoothed out than the Fast Stochastic creating fewer head fakes.
A difference between Fast Stochastics and Slow Stochastics is merely 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 a moving average. Don't think about that too much.
That slows the movement of the indicator, consequently the name of Slow Stochastics. By slowing the movement of the indicator down, we will observe less signals to buy or sell on the stock chart, however they ought to be more dependable signals to trade for profit.
As you can check out in the illustration above, the Slow Stochastic provides fewer buy and sell signals however they are more reliable.
The settings I like to use for the Slow Stochastics depends on the market or stock I am trading. I constantly get a giggle out of stock traders who try and use a one size fits all approach. I say use the power of modern day computers and more sophisticated charting tools like Market Club that give a real time java interface that lets you scale the settings in real time. Simply take the slider and fiddle with 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).
In addition keep the kind of Stochastic signal you are planning to either buy or sell as changeable as well. For example, you might discover that the signal line breaking above the 20 line is a good buy indicator, while a good sell indicator is the signal line breaking below the %D line. You may perhaps find that for the stock you are in that a cross of the signal line and the %D line is a better buy signal while a good sell signal is when the signal line goes above 80 for a day or two and then crosses under the 80 line. You might discover that bullish divergences are better trade signals for certain stocks and markets. For example, go long when the stock price makes a good low but the Stochastic plots a shallower low.
Keep in mind, every stock and market has its own behavior at unique times of the year since that personality is a reflection of the combined human psychology of all the traders who are trading that exact market at a particular time of year. Learn to modify your Stochastic to the market you are trading and to your own trading method, and watch the profits start to pour in.
trade slow stochastic
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