Stochastics can be either fast or slow. This speed doesn’t relate to the number of time periods that it covers, but how swiftly it will reply to a change in direction from bullish to bearish or vice versa. The fast stochastic is more reactive, like a fast vehicle. This is the mathematical formula for fast stochastics :
%K = 100((C â L14)/(H14 â L14))
C = last closing price, L14 = lowest low during the past fourteen periods, H14 = highest high during last 14 periods.
There is also a signal line %D which is a 3 period moving average of %K. Stochastic based trading systems generally take a signal from the crossover of the two lines %K and %D.
The fast stochastic was the first and is still the main stochastic indicator used by traders. But some traders find it replies to changes in movements in prices too quickly, resulting in an early signal. Thus slow stochastics were developed.
The slow stochastic indicator applies a 3 period moving average to the %K of the first equation. The new %D is then a three period moving average of the new slow %K. Obviously this is going to reduce sensitiveness to minor fluctuations in price .
The slow indicator is therefore the one that is most frequently utilized by day traders. It reduces the possibility of coming to the market on a false signal and also forestalls closing out of a trade too soon.
Part of the reason that stochastics are often ignored by day traders is they target the fast stochastic while in truth the slow stochastic would serve them far better. It can be extremely effective, so check it out in your charts or look for a technical charting service that provides it.