• Home >
• Education >
• Technical >
• Advanced Indicator Manual >

• Send
• Print
• Add To

STOCHASTICS FAST

Doug Schaff

FX-Strategy

http://www.fx-strategy.com

Stochastics were developed by George Lane in the 1950�s and are based on the assumption that as price rises the close of the bar will tend to be towards the high of the recent range. Equally, as price declines the close of the bar will tend to be towards the low of the recent range. It is often used to confirm price movement or identify turning points in price.

The high and low of the number of periods requested by the input parameter is taken to establish a range, and the current price is then compared to this range and expressed as a percentage. The resulting calculation is then indexed and plotted as Percentage FastK. A type of smoothed average of Percentage FastK, known as Percentage FastD, is also plotted. %FastK and %FastD plot as oscillators with values from 0 to 100. The direction of the Stochastics reflects confirm recent price movement, i.e Rising prices confirms rising Stochastics and the potential for further moves in that direction.

Formulae:

��������	%K = 100 *��	( Close - Lowest Low of "x" periods )	(Position of close in range)
		(Highest High for "x� Periods � Lowest Low of "x" periods )����	(Range)
�	�	�	�
�	%D = 100 *	"y" period sum of the numerator	�
		"y" period sum of the denominator	�

As can be seen from the chart displayed, Fast Stochastics produce a very choppy FastK line with an equally choppy FastD line. The general method of using Stochastics is as an overbought and oversold indicator in consolidating markets, but it can be seen that Fast Stochastics tend to produce many extremes where price continues in the direction of the extreme. There are other usages of the FastK and FastD lines.

1. To identify the crossing of %K across %D in the direction of the %D movement. In other words, the only crossovers of %K across %D that Lane accepted were those where %K crossed below %D while %D was itself declining. Two of these examples are shown in the above chart, ringed in green.
2. The occurrence of the condition in point 1 is not that frequent. Thus there are other types of signal involving a cross or near cross, this being the "kiss" of %K on %D. Where %D is rising a decline of %K to (or close to) %D and then a subsequent rise the next bar completes a "kiss" and often produces profitable results. Conversely, if %D is declining and %K rises towards (or close to) %D and then rises again the next bar the result is often a solid rally. These examples are shown in the above chart, ringed in blue.
3. If using the crossover of %K across %D it is a stronger signal if the crossover produces a movement that takes out the highest high (or lowest low in the case of a cross lower) of the past 5 bars. Until that point the crossover is not valid. These examples are shown in the above chart, ringed in pink.