Stochastic oscillator compares the securities current closing price relative to its price range for a given time period.
Stochastic oscillator has two lines. The first line is called “Fast%K” and the second line is called “Slow%D” which is either moving average (MA) or exponential moving average (EMA).
Stochastic oscillator Fast%K is calculated as below.
Since the Fast%K line will be more jerky and sensitive to even small price changes, it is normally smoothed it by averaging the highest high and lowest low over a number of periods called %K Slowing periods.
The Fast%K line is for a %K periods of 10 and which has a %K Slowing periods of 5 is written as,
Fast%K [10, 5]
Slow%D line is drawn by calculating either MA or EMA for %D periods.
The Slow%D line which is calculating by averaging the Fast%D for %D periods of 5 is written as,
Slow%D [5]
When the Fast%K line rises above the Slow%D line bullish signal is given and when the Fast%K line falls below the Slow%D line bearish signal is given.
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