| Characteristic: | Momentum Indicator | ||
| Parameter Defaults: | Fast %K Period | 5 | controls the measurement period for the %K line |
| Fast %D Period | 5 | controls the measurement period for the %D line | |
| Slow %D Period | 5 | controls the measurement period for the Slow%D line | |
| Plots: | SlowK | ||
| SlowD | |||
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 %FastK.
A type of smoothed average of %FastK, known as %FastD, is also calculated and
renamed %SlowK. Finally %SlowD is calculated by taking a running average of
%SlowK. %SlowK and %SlowD are plotted 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) | |
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| (Highest High for "x’ Periods – Lowest Low of "x" periods ) (Range) | (Range) | ||
| %D = | 100 * "y" period sum of the numerator | ||
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| "y" period sum of the denominator | |||
| %SlowD = | "z" period running average of %SlowK |
The slow form of Stochastics is used more as an overbought and oversold indicator in consolidating markets. However, they must be used wisely and it is often a good filter to endure that price moves through the highest high (in the case of a cross higher) or below the lowest low (in the case of a cross lower) for the past few periods to confirm price is reacting to the momentum change.
Slow Stochastics also provide bullish and bearish divergences against price at trend reversal that indicate that the underlying price direction is slowing.
