A:

The main difference between fast and slow stochastics is summed up in one word: sensitivity. The fast stochastic is more sensitive than the slow stochastic to changes in the price of the underlying security and will likely result in many transaction signals. However, to really understand this difference, you should first understand what the stochastic momentum indicator is all about.

The stochastic momentum oscillator is used to compare where a security's price closed relative to its price range over a given period of time. It is calculated using the following formula:

%K = 100[(C – L14)/(H14 – L14)]

C = Most recent closing price
L14 = Low of the 14 previous trading sessions
H14 = Highest price traded during the same 14-day period.

A %K result of 80 is interpreted to mean that the price of the security closed above 80% of all prior closing prices that have occurred over the past 14 days. The main assumption is that a security's price will trade at the top of the range in a major uptrend. A three-period moving average of the %K called %D is usually included to act as a signal line. Transaction signals are usually made when the %K crosses through the %D.

Generally, a period of 14 days is used in the above calculation, but this period is often modified by traders to make this indicator more or less sensitive to movements in the price of the underlying asset.

The result obtained from applying the formula above is known as the fast stochastic. Some traders find that this indicator is too responsive to price changes, which ultimately leads to being taken out of positions prematurely. To solve this problem, the slow stochastic was invented by applying a three-period moving average to the %K of the fast calculation. Taking a three-period moving average of the fast stochastic's %K has proved to be an effective way to increase the quality of transaction signals; it also reduces the number of false crossovers. After the first moving average is applied to the fast stochastic's %K, an additional three-period moving average is then applied - making what is known as the slow stochastic's %D. Close inspection will reveal that the %K of the slow stochastic is the same as the %D (signal line) on the fast stochastic.

An easy way to remember the difference between the two is to think of the fast stochastic as a sports car and the slow stochastic as a limousine. Like a sports car, the fast stochastic is agile and changes direction very quickly in response to sudden changes. The slow stochastic takes a little more time to change direction. Mathematically, the two oscillators are nearly the same except that the slow stochastic's %K is created by taking a three-period average of the fast stochastic's %K. Taking a three-period moving average of each %K will result in the line that is used for a signal.

For more insight, read Stochastics: An Accurate Buy and Sell Indicator.

RELATED FAQS
  1. What are the best technical indicators to complement the Stochastic Oscillator?

    Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
  2. What is the difference between Stochastic Oscillator & Stochastic Momentum Index?

    Discover how the stochastic oscillator and the Stochastic Momentum Index differ and why the latter is considered a more refined ... Read Answer >>
  3. How do I read and interpret an Stochastic Oscillator?

    Understand the basics of the stochastic oscillator and how analysts and traders use this measure of trend momentum to predicts ... Read Answer >>
  4. How do I use Stochastic Oscillator to create a forex trading strategy?

    Learn about the stochastic oscillator and how to it is used to create an effective forex trade strategy, including how to ... Read Answer >>
  5. What are the differences between Relative Strength Index (RSI) & Stochastic Oscillator?

    Learn about some of the main differences between the relative strength index and the stochastic oscillator, two well-known ... Read Answer >>
Related Articles
  1. Trading

    Triple Screen Trading System - Part 5

    Stochastics can be very effective as the second screen in this three-part system. Find out how to use this popular oscillator.
  2. Trading

    Do You Have The Right Settings On Your Stochastic?

    Use these helpful tips to unlock Stochastics' full potential.
  3. Trading

    MACD and Stochastic: A Double-Cross Strategy

    Two indicators are usually better than one. Find out how this pairing can enhance your trading.
  4. Trading

    Trading Volatile Stocks with Technical Indicators

    Short-term traders seek volatility because of the profit potential, which leads to two common questions. How do I find volatile stocks? And how do I use technical indicators to trade them? Find ...
  5. Trading

    3 Nasdaq-100 Stocks With Weekly Breakout Patterns (FAST, ISRG)

    Zoom out to the weekly chart and wait for large-scale buy signals to dictate market exposure.
  6. Trading

    Buy the Dip During Dog Days

    Buying the dips can book reliable profits but aggressive trade management is needed to control downside risk.
  7. Insights

    Fast Food Versus Fast Casual: Which is More Profitable?

    Between fast food and fine dining lies the rapidly growing fast casual business sector. It's market share is growing. Are profits growing too?
  8. Trading

    Mastering Short-Term Trading

    The goal of any trading strategy is keeping losses at a minimum and profits at a maximum, and this is no different for short-term trading.
RELATED TERMS
  1. Williams %R

    In technical analysis, this is a momentum indicator measuring ...
  2. Crossover

    The point on a stock chart when a security and an indicator intersect. ...
  3. Heston Model

    A type of stochastic volatility model developed by associate ...
  4. Local Volatility

    A model used in quantitative finance to calculate the unpredictability ...
  5. Oscillator

    A technical analysis tool that is banded between two extreme ...
  6. Detrended Price Oscillator (DPO)

    An oscillator that strips out price trends, in an effort to estimate ...
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center