Introduction
The slower version of Stochastics is commonly believed to be a more
reliable indicator. In this version of Stochastics the more sensitive %K
line is dropped. The original %D now becomes the slower line %K. The new
%D is a 3-day moving average of the %K. This basically gives you a
smoothed version of the original indictor. This modified counter trend
indicator is less reactive but considered to be more accurate.
Interpretation
Slow Stochastics are interpreted the same as fast Stochastics. Quite
often the faster of the two indicators moves into and out of the
overbought/oversold regions quickly.
Example of the SSTO in the Indicator Window:
Calculation
Parameters:
 |
Overall Period (14) - the number of periods used to determine the
highest high and lowest low. |
|
|
%K MA Period (3) - the number of periods used to determine the moving
average for the %K value. |
|
|
%D MA Period (3) - the number of periods used to determine the moving
average for the %D value. |
|
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AdditionalLinePeriod (3) - the number of periods used to determine an
additional Moving Average on the Stochastic. |
Formula:
The calculations for the slow stochastic are similar to the normal
stochastic. The first step in computing the stochastic indicator is to
determine the n period high and low. For example, suppose you specified
twenty periods for the stochastic. Determine the highest high and lowest
low during the last twenty trading intervals. It determines the trading
range for that time period. The trading range changes on a continuous
basis.
The calculations for the %K are as follows:
%Kt = ( (Closet - Lown) / (Highn - Lown) ) * 100
%Kt: The value for the first %K for the current time period.
Closet: The closing price for the current period.
Lown: The lowest low during the n periods.
Highn: The highest high during the n time periods.
n: The value you specify.
Once you obtain the %K value, you start computing the %D value, which is
an accumulative moving average. Since the %D is a moving average of a
moving average, it requires several trading intervals before the values
are calculated properly. For example, if you specify a 20 period
stochastic, the software system requires 26 trading intervals before it
can calculate valid %K and %D values. The formula for the %D is:
%DT = ( (%DT-1 * 2) + %Kt) / 3
%DT: The value for %D in the current period.
%DT-1: The value for %D in the previous time period.
%Kt: The value for %K in the current period. The values 2 and 3 are constants. You specify the constants and the
length of the time period to examine for the trading range.
Once the %K and %D values for the normal stochastic are derived, the
slow stochastic can be computed. The formula for the slow stochastic is
below:
%KSLOW = %DNORMAL
%DSLOWt = ( ( %D SLOWt-1 * 2 ) + %K SLOWt-1 ) ) / 3
%KSLOW: The %D for the normal stochastic.
%DSLOWt: Slow %D value for the current period.
%DSLOWt-1: The slow %D for the previous period.
%KSLOWt-1: The slow %K for the previous period.
The values 2 and 3 are the smoothing constants. You may select different
values.
Customizing
To change the settings of this indicator, open the Program Options
screen by clicking the "Program Options" button located on the main
Toolbar.
See the Program Options section for more details on changing the
settings.
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