4.29 Full Stochastic

 

The “Full Stochastic” combines the features of Slow and Fast versions and gives us the flexibility to change parameters. 

 

As you have seen in the previous lesson, the slow stochastic smoothens out the original stochastic to reduce the number of false signals but it does not allow us any flexibility to configure the smoothness without changing the parameter to calculate %D. Full stochastic gives us the flexibility to configure that.

 

Let's see what we mean.

 

You have a slow version with the standard settings of 14 and 3. Here you look back into past 14 periods to find the relative position of current closing with reference to the highest and lowest prices of the selected period of time. Then smoothen this line out by taking 3 days simple moving average of the same and this line becomes your main stochastic line. Now you again take 3 day SMA of this to get your trigger line. Confusing? Well, read again, one step at a time, and you will find that actually its quite simple. You want us to put some bulleted points, well here we go... and remember we are talking about the slow version:

 

  • Look back into past 14 periods to check where the current close lies in relation to the highest and lowest price of past 14 periods. Get all such data points.
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  • Calculate the SMA for 3 periods of the above data points. 
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  • The line joining all the points in the bullet above becomes the main stochastic line. What you have achieved is smoothening of your 14 periods data points by 3 periods' SMA.
  •  

  • Take 3 day SMA again of the above and the line joining all those points become the trigger line. 

 

Well, now suppose you wish to keep your trigger line calculation same but wish to smoothen the main line a bit more or less. Could you do it? Actually no. the parameter 3 is used to smoothen the main line as well as to calculate the data points for the trigger line.

 

Full stochastic gives you that flexibility of break the above connection by giving you one more configurable parameter. These are as follows:

 

  • The first parameter decides the number of periods you look back to.
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  • The second parameter defines the number of periods you wish to use the SMA to be calculated to smoothen the main line.
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  • The third parameter decides the number of periods for the SMA to derive the trigger line.

 

The standard settings for the full version would look like "14, 3, 3", which is nothing but the slow version of stochastic with the settings "14,3". Change the parameter in middle to anything else, say 7, and you are smoothening out the main line by it's SMA of 7 periods and then taking out a 3 period SMA of that to have your trigger line. Simple, isn't it?

 

Let's check the full stochastic oscillator on a Forex chart to compare it with other versions.

 

Full stochastic. 

 

When and Which?

 

In the above chart the full stochastic has been derived by configuring the smoothness of the original stochastic by 7 periods by using the parameter settings as 14, 7 and 3.

 

The chart may make you think that the full stochastic is the cutest one - so smooth, right?

 

Well, going on the looks may not be always right. Taking things on the face value may also not be right, always. The points to be kept in mind are as follows:

 

  • Overbought and oversold zones for all versions of stochastic are almost in the same time-frame. Hence, if you use stochastic oscillator to tell you overbought and oversold situations to trade with, you are almost good with any of the versions. Just trade as explained in the fast stochastic chapter.
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  • If you wish to trade with the crossover signals, you may like to go with different versions in different situations. When the market is too volatile with too many market noises, the number of fake-outs is more and hence the probability of encountering false signals is more. In such situations you may prefer a very slow oscillator which can filter out as many as signals to ensure though you get very few signals but those have higher reliability. When market is more stable and temporary volatile moves are less, you may like to have a faster indicator with more signals so that you do not miss an opportunity.

 

Stochastic Types- Summary of differences:

 

Type %K %D
Fast Stochastic (14,3)

 

Current price comapred to the highest and lowest previous 14 periods.

 

3 period moving average of %K
Slow Stochastic (14,3) 3 period moving average of %K of Fast Stochastic = % K of Slow version.

 

3 period moving average of %K of Slow Stochastic. In case we had smoothed %K by some other value than 3 then the same value would have been used to calculated %D.

 

Full Stochastic (14,X,3)

 

X period moving average of %K of Fast Stochastic = % K of Full Stochastic. If X= 3 then this Full version is same as the above mentioned Slow version. 

 

3 period moving average of %K of Full Stochastic

 

   

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