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Slow Stochastic Oscillator – Technical Analysis Indicator

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Slow Stochastic Definition

The slow stochastic indicator is a price oscillator that compares a security’s closing price over “n” range. The most commonly used range for the slow stochastic indicator is 14. The slow stochastic formula is calculated as follows:

Slow Stochastic Formula

To calculate the slow stochastic, replace “n” with the range your are monitoring. If you plan on using 14, you will want to find the highest and lowest values over the last 14 trading bars. The slow stochastic can be calculated on any timeframe.

Misconceptions of Slow Stochastics

Divergence in Slow Stochastics and Price Trend

Traders will often cite when a stock makes a higher high, but the stochastics does not exceed its previous swing high, that the trend is in jeopardy. This couldn’t be the furthest thing from the truth. The slow stochastics indicator ranges from 0 – 100. So, as a stock rallies, how can the stochastics continue to make higher highs if it hits 98.85? Unlike price which has no boundaries, the slow stochastics is an oscillator, so it will never truly mimic a security’s price action. All that matters is that the stochastics continues in the direction of the primary trend.

Oversold and Overbought Levels

Traders will often exit long trades when the slow stochastics crosses 80 or will buy when the slow stochastics crosses under 20. The problem with this trading methodology is that if a stock is over 80, it should not be looked upon as overbought, but rather as trending strongly. Also, if the slow stochastic is below 20, this is a sign of weakness and without any other form of support present.

How to trade the stochastics profitably

Identify stochastics with smooth slopes

Stochastics that have smooth slopes, which move from overbought to oversold have higher odds of finding support and triggering a valid buy signal. The smooth line of the stochastics implies that the move down was sharp and without much reaction, this furthering the odds of a counter move up.

Slow Stochastics Buy

Do not buy sloppy oversold signals

Far to often new traders will buy oversold slow stochastic readings blindly. Remember, the slow stochastic is an oscillator and like any other oscillator, it can trend sideways for an extended period of time.

Slow Stochastics False Signal

Alton Hill

Alton Hill

I am a co-founder of Tradingsim.com and an IT professional that specializes in large scale Systems Integration projects. I have actively traded the markets since 2000 and believe that true trading mastery comes from practice. When I'm not working on a new trading strategy, I enjoy spending time with my wife and kids.
Alton Hill

Comments

  1. I find slow stochastic a good indicator using with a exponential moving average for buying signals where there are “sloppy oversold signals”  helps in buying where there is confusion
     

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