The Slow Stochastic is also a range bound indicator. It needs a sideways market
in order to be accurate with its overbought/oversold signals. See on the left side
of the chart that it gives bad signals (shown by the “X” over them). Yet on the
latter half of the chart, the stock is in a range and gives accurate signals. While
Stochastics can pick up divergence, the MACD is still better used for that. (Note:
There is also the Fast Stochastic but whipsaws so much that it tends to do very
little good and not many ever use it.)
The Stochastic Oscillator measures where the close is in relation to the recent
trading range. The values range from zero to 100. %D values over 75 indicate an
overbought condition; values under 25 indicate an oversold condition. When the Fast
%D crosses above the Slow %D, it is a buy signal; when it crosses below, it is a
sell signal. The Raw %K is generally considered too erratic to use for crossover
signals.
The Stochastic Indicator was developed by George C. Lane.
Terminology:
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Fast Stochastic
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Refers to both %K and %D where %K is un-smoothed
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Slow Stochastic
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Refers to both %K and %D where %K is smoothed
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Raw %K
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Un-smoothed %K
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Fast %K
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Un-smoothed %K
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Slow %K
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Smoothed %K
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Fast %D
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Moving average of an un-smoothed %K
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Slow %D
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Moving average of a smoothed %K, in effect: a double smoothed %K
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%D
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Always refers to a smoothed %K (whether or not the %K itself is smoothed)
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Formula:
To recap: The best technical indicators are firstly trend lines/support/resistance/volume.
After that would come the versatility of the MACD. It can be left on the chart at
all times. Use only buy signals in the uptrend and sell signals in the downtrend.
Use both signals in a range.
In Trends use 2-3 of the following maximum:
1. Trend lines
2. Moving Averages
3. MACD (buys in uptrend or sells in downtrend)
4. ADX (above 30)
5. PSAR (for stops in strong trends) OR
6. ATR levels for stops
In Ranges, use 2-3 of the following maximum:
1. Support/Resistance
2. MACD – both buy and sell signals
3. Bollinger Bands
4. RSI
5. Slow Stochastics
6. ADX below 30
7. ATR levels for stops