 # Stochastics

## Fast and Slow Stoch Technical Indicators

Stochastics indicators measure the current position of a stock, share or other security in relation to the highest high point and lowest low point over a set period of time. This measurement is expressed as a percentage, with 100% being where a stock is at the very highest point that it has reached during the period in question, 0 being the very lowest and 50 being exactly half-way. For example, if we use a time period of 14 days in our study...and if the highest point that the stock has reached during those 14 day is 82 pence (or cents), and the lowest value that it has reached is 70 cents, and today's closing price is 73 cents, then the raw %K stochastic is 25. More details about calculations and the different types of stochastic indicators are shown below.

#### Calculation of Fast and Slow Stoch Stochastics

As indicated above, the raw %K stochastic is calculated as follows:
%K = (Today's closing price - lowest low during the last [period] days) ÷ (highest high during the last [period] days - lowest low during the last [period] days)
where period represents the number of days prior to today which are being used in the calculation. A popular period for stochastic calculation is 14 days, but periods of 5 to 20 days may be used.

Once the %K stochastic is obtained, the %D stochastic is arrived at by calculating a short-term moving average of the %K value. One of the most popular periods for the moving average is to use a 3 day moving average of the %K figure to obtain the %D value. We'll see later how the %D and %K interract to produce buying and selling signals when it comes to interpretation of the stochastic indicators.

The above method gives a fast stochastic (or fast stoch) %K and %D value which is very sensitive to price changes and can oscillate quite considerably. This can potentially give a large number of false signals when it comes to interpretation, so, in order to smooth out the oscillating movements, a slow stochastic can be calculated.

The usual way of obtaining the slow stochastic (or slow stoch) is to use a moving average of the fast stochastic's %K and call the result the slow stochastic %K. Effectively, therefore, if a 3 day moving average of the fast stochastic's %K is used to calculate the slow syochastic %K, then the slow stochastic %K ends up as being identical to the fast stochastic's %D value. A 3 day moving average of the fast stochastic's %K is indeed a common period to use, but other periods may be used as an alternative.

Then, once the slow stoch %K value has been determined, the slow stoch %D is obtained by calculating a moving average of the slow stochastic %K (again, a 3 day period is often used to calculate the moving average). Therefore the slow stoch %D ends up as being a moving average of a moving average of the raw fast stochastic %K.

An alternative way of calculating the slow stochastic is used by some analysts: Instead of obtaining the slow stoch by calculating a moving average of the fast stochastic %K, different periods are simply used in the original calculations. For example, one particular online charting service uses a 5 day period of price data to calculate the raw fast stochastic %K, with a 3 day moving average applied to the fast stoch %K to obtain the fast stochastic %D, but uses a 15 day period of price information to calculate the slow stochastic %K, with a 5 day moving average applied to this slow stoch %K to generate the slow stochastic %D.

Whichever method is used, bear in mind that many analysts consider that the slow stochastic can give more reliable results than the fast stoch.

#### Stochastics Interpretation

Analysts consider that a buying signal occurs when the %K line crosses and rises above the %D line. Conversely, a cross-over where the %K line drops below the %D is believed to be a sell sign.

If either the %K or %D fall below 20 and then starts to rise again above 20, this may be considered a buy sign. Similarly, a selling signal is thought to occur if the indicator rises above 80 and then begins to fall below 80.

Divergences are also considered to be a buy signal, although may be more difficult to identify. If the price is making a lower low, but the stochastic is making a higher low, some may conider this to be a buy signal, and vice-versa.

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