Slow Stochastic was developed to avoid some false trading signals which the Fast Stochastic may give.
As a recap of the original or fast stochastic:
highest and lowest of the selected period
- The %D line is SMA (Simple Moving Average) of the %K for previous 3 periods.
Stochastic Oscillator - Chart 1:
As mentioned above, the “Fast Stochastic” indicator may give frequent false trading signals as the data is not smoothened. It’s like a person who is very anxious would jump at each movement to cry and shout “Wolf….” without thinking twice. The Slow Stochastic” indicator tends to be slow in giving signals i.e. less crossovers or less signals. In other words Slow Stochastic is not so fast in becoming anxious to cry and shout “Wolf” :)
The points marked by “F” in the above chart indicate that though there was a crossover of %K line and %D lines, the trading signal were False” or “almost False” i.e. though a particular trading signal was not truly false but could not result in much profit practically.
(%K line going above %D line means uptrend or “buy” signal and %K line going below %D line means downtrend or “sell” signal).
What exactly is the difference in Fast and Slow Stochastic from calculation point of view?As mentioned above that “Slow Stochastic” was designed to take out some false signals. What we are trying to do is that instead of thinking just about very current value we try to think a bit more about the recent movements. This gives more weight to the recent past data. In simple words it is like not getting very excited about today’s movements but looking a bit deeper into the recent past data in order to take the trading decision.
To find %K (slow) in the Slow Stochastic Oscillator, a 3-period SMA (simple moving average) is applied to %K (fast). This 3-day SMA slows (or smoothes) the data to form a slower version of %K (fast). In Fast Stochastic the %D is 3-period SMA of %K. In Slow Stochastic the %K is 3-period SMA of %K of Fast Stochastic. That means %K of Slow Stochastic = %D of Fast Stochastic. A close examination of figure 3 above would reveal that %D (Fast), in the Fast Stochastic Oscillator, is identical to %K (Slow) in the Slow Stochastic Oscillator.
To form the trigger line, or %D (slow) in the Slow Stochastic Oscillator, a 3-day SMA was applied to %K (Slow).
Summary of Difference in fast and slow stochastic:
Please also check about Full stochasitic and the summary of differences of all three types of stochastic oscillators i.e. fast, slow and full.
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