Fast Stochastic
Type
Momentum oscillator
Short introduction
The "Fast Stochastic" indicator (or "Stochastic") was developed by George C. Lane and is one of the most common indicators. The Fast Stochastic is displayed in a separate chart.
Statement
The idea behind the stochastic is that in an uptrend the daily closing prices are closer to the high of the day, while in a downtrend the closing prices are closer to the low. A trend reversal is indicated by the fact that closing prices are increasingly moving in the opposite direction. If the value then closes at a daily high or low, the trend is considered to be over.
The stochastic is based on 2 lines, the %K line and the %D line. The %D line is a MA of the %K line. Both lines vary between 0 and 100. In addition to this Fast Stochastic indicator, the Slow Stochastic is also calculated. In this case, the %D line is taken as a basis and a MA is calculated on its basis.
Formula/calculation
%K = ((C - Ln) รท (Hn - Ln)) * 100
%D = 3-day MA of %K
%K = Fast Stochastic
%D = Slow Stochastic (moving average of %K)
where:
MA = Simple Moving Average
C = Close (current close price)
Ln = Low (lowest price in analysed period)
Hn = High (highest price in analysed period)
(%K is multiplied by 100 to shift the comma by two digits)
The following MA variants can be used for smoothing via the parameters:
- Simple MA (SMA) - Default setting
- Exponential MA (EMA)
- Weighted MA (WMA)
Interpretation
A value of 0 (zero) indicates that the current closing price is the lowest price in the observation period, conversely a value of 100 indicates that the closing price is the highest value. As with RSI, values close to the maximum indicate overbought situations, values close to the minimum indicate oversold situations. A crossing of the upper extreme line (usually at 70-80%) from top to bottom generates a sell signal, a crossing of the lower extreme line (usually at 20-30%) from bottom to top generates a buy signal.
In addition to this most common interpretation, the crossing of the two lines, preferably within the extreme zones, also generates signals (similar to MACD).
Default setting
- %K: 14 periods (stochastic period)
- D period: 3 periods
- Smoothing: MA
- Overbought: 80%
- Oversold: 20%
Example: Fast Stochastic
