Given the hundreds of indicators that are available to traders, finding the appropriate technical tools to use in day trading can be a difficult task. The good news is that the majority of indicators can be used in day trading simply by adjusting the number of time periods used in creating the indicator. Most traders are accustomed to seeing each indicator use each daily close as one period in the calculation, but they quickly forget that the interpretation remains the same whether the data used in one period is equal to a day, a minute, a week, a month or a quarter.
One indicator chosen by many traders is the fast or slow stochastic oscillator. As a refresher:
The stochastic oscillator is calculated using the following formula:
%K = 100(C - L14)/(H14 - L14)
C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period
%K = the current market rate for the currency pair
%D = three-period moving average of %K
In an upward trending market, prices should close near the highs, while in a downward trend, it should close near the low end.
The slow stochastic is one of the most popular indicators used by day traders because it reduces the chance of entering a position based on a false signal. You can think of a fast stochastic as a speedboat; it is agile and can easily change directions based on sudden movement in the market. A slow stochastic, on the other hand, is more like an aircraft carrier, in that it takes more input to change direction. (See also: What Is the Difference Between Fast and Slow Stochastics?)
In general, a slow stochastic measures the relative position of the latest closing price to the high and low over the past 14 periods. When using this indicator, the main assumption is that the price of an asset will trade near the top of the range in an uptrend and near the bottom in a downtrend. This indicator is very effective when used by day traders, but one problem that may arise is that some charting services might not include it as an option on their charts. If this is the case for you, you may want to consider re-evaluating which charting service you use. (See also: Getting To Know Oscillators - Part 3.)