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The Slow Stochastic Indicator

August 27, 2011 by Brian Cullen| Tips & Strategies

The Slow Stochastic is an oscillator type indicator that is used to help identify changes in momentum while identifying support and resistance levels. Its basic function is to identify that during periods of price decreases, daily closes tend to accumulate near the lows of the trading range. Conversely, during periods of price increases, closing prices tend to accumulate near the highs of the range. The purpose of using this indicator is to identify markets that are in overbought or oversold territories and trending for a reversal.

The Slow Stochastic Indicator is plotted on a chart using a range of 0 to 100. When the Stochastic lines are above 80 it is considered overbought, and when they are below 20 it is considered oversold. For more conservative traders, you can use the 75 and 25 levels respectively. For the most reliable read, look for the divergence level (%D) to be between 10-15 for a BUY signal and between 85-90 for a SELL signal.

Sideways or range bound markets are not the optimum conditions with which to use this indicator. The Slow Stochastic Indicator is best utilized in a trending market.

The Stochastic Indicator is comprised of two parts:

  • The %K indicator line (generally denoted in red) is the number of periods used in the calculation of the study. It is the faster moving line. N period default is generally set to 14.

%K = (Today’s closing price) – (lowest price of the last N period)
(Highest high during the last N period) – (lowest low of the last N period)

  • The %D indicator line (generally denoted in blue) is the number of periods used to calculate the moving average. It is the slower moving line. N period default is generally set to three.

%D= The Moving Average of the %K stochastic indicator

We use the Slow Stochastic as an indication of a trend change and as an alert to bring our attention to a certain market set-up and a possible trade. While it generally is an early indication, we remain aware of false reads that may be given, and we believe it is of the utmost importance that this indicator be used in conjunction with other indicators, such as the MACD (moving average convergence divergence) and Moving Averages.

It is important to remember that technical indicators do not guarantee what is going to happen, so they should be used as a guide to prepare you for what is likely to happen. By blending these three indicators we are able to identify high quality entry and exit points.

When using this indicator you will want to pay attention to what the %K line is doing in comparison to the %D line.

See the chart at the end of this article for an example of how it looks and works

We look for a Bullish reversal signal when both lines approach the 20 level:

  • BUY signals are generated when the %K line crosses over the %D line to the UPSIDE

We look for a Bearish reversal signal when both lines approach the 80 level:

  • SELL signals are generated when the %K line crosses over the %D line to the DOWNSIDE

When one of these patterns appears, you should anticipate a market signal.

Filed Under: Tips & Strategies

About Brian Cullen

Brian’s career began working with equities and equity options at Charles Schwab. Since then he has held various positions within the financial industry, from head clerk on a high volume trading desk on the floor of the CBOE, to being a “market maker” for a proprietary trading firm in the SPX and OEX pits. Brian then branched off to expand his horizons and transitioned into the futures market as a retail broker. He was a Market Strategist for Lind-Waldock’s Private Client Group division, dealing exclusively in the commodity markets.

Brian joined Daniels Trading in early 2009 to expand his added value services as a broker, and to build his client base in new areas. With Daniels Trading’s diversified execution categories, the opportunities for Brian’s clients are endless.

Brian’s goal is to work with his clients to focus on one main principle: Staying true to the principles of successful trading.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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