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:
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.
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.