Description: One of the most popular momentum oscillators used by technical traders is the Slow Stochastic Oscillator. The indicator gauges the closing price of a security with respect to its high low range over a certain period of time. The Slow Stochastic Oscillator oscillates on a scale of 0 to 100.
During an uptrend, the closing price of a security tends to close near the day’s high. Similarly, during a downtrend, the closing price of a security tends to close near the day’s low. Any anomaly in this normal behavior may result in the momentum getting abated and eventually a trend reversal. The Slow Stochastic Oscillator is more useful during range bound markets. The indicator consists of two lines – the %K and a moving average of the %K line, also known as %D.
The Slow Stochastic Oscillator differs from the Fast Stochastic Oscillator in this respect that the former one uses a slowing period of 3 for the %K line which makes it smoother in appearance.
Slow Stochastic Oscillator Calculation:
%K = (C – LLV14) / (HHV14 – LLV14) * 100
%D = 3 SMA of %K
C = Current Closing Price
LLV = Lowest low value over the last 14 periods
HHV = Highest high value over the last 14 periods
%K slowing = 3
Overbought and Oversold: A reading above 80 on the Slow Stochastic Oscillator is considered as overbought, while a reading below 20 on the indicator is considered as oversold. When the indicator surges above 80 and then dips below it, a sell signal is generated. Similarly, when the indicator dips below 20 and then crosses above it, a buy signal is generated.
Crossovers: The Slow Stochastic Oscillator can also be used for signal generations using the %K and %D crossovers. Notably, when the %K line crosses over the %D line in the oversold region, we get a buy signal on the security. Likewise, when the %K line crosses below the %D line in the overbought region we get a sell signal.
Divergences: The most important signals on the Slow Stochastic Oscillator are generated when divergences appear between the indicator and the stock price. For example, when the security makes a higher high while the oscillator makes a lower high, it indicates that the upward momentum is slowing down which often results in a trend reversal to the downside. Likewise, when the security is makes a lower low but the Slow Stochastic Oscillator refrains from doing so and makes a higher low, we should note that the downward momentum is getting abated which often precedes a trend reversal to the upside.
To know more on various trading strategies using the Stochastic Oscillator, please read Top 3 Stochastic Trading Strategies for Profitable Trading.
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