3 Types of Stochastic Indicators
Fast, Slow and Full Stochastic
There are three types: fast, slow and full. All the 3 version of this indicators look at a given period for example the 10-day period, and measure how today's price close compares to the high and low range of the time period that is being considered.
Stochastic works based on the principle that:
- During an uptrend, price action tends to close at the high of the candle.
- During a downtrend, price action tends to close at the low of the candle.
This Oscillator shows the strength of the Forex trends, and identifies times when a currency is oversold or overbought.
This indicator plots two lines, one solid and one dotted on the indicator section. These two lines are called the %K line and %D line. In this versions the %K and %D lines are calculated differently from the other versions, so as to add extra smoothing.
One disadvantage of using this Oscillator is that the %K and %D lines are too sensitive and they often give whipsaws when they get to the overbought and oversold levels. The fast stochastic lines are prone to fake signals/whipsaws.
This Oscillator smooths out the price data used for the original calculation and it is used by many Forex traders. This version is less prone to whipsaws compared to the fast version.
For the slow stochastic a 3 period moving average is used to smooth out the stochastic lines. The moving average is not that of the price action but of the indicator lines data.
This indicator does not use a fixed moving average period, like the slow version above. Traders don’t want to use a fixed setting to calculate the indicator. Because of this reason the full stochastic was developed by traders and it is more flexible than the earlier two versions. The version allows traders to choose the period they want for the fast and slow indicator line.