Window Oscillators and Overlay Indicators
The default lookback period for the fast or raw %K is 14 periods. If we
smooth the %K by creating a simple 3‐period moving average of it, we call this
the fast %D. If we further create a 3‐period simple moving average of fast %D,
we get the slow %D.
In short, the fast %D line is a smoothed version of the raw %K line and the
slow %D line is a double smoothed version of the raw %K line. The %D line is
used to determine overbought and oversold levels, 50 percent level crossovers,
divergence, and signal line crossovers. When using the raw %K, the fast %D rep-
resents its signal line, and when using the slow %K line, the slow %D becomes its
signal line. As far as signal line crossovers are concerned:■ (^) Whenever the fast %K line crosses above the fast %D signal line, it represents
a buy (bullish) signal.
■ (^) Whenever the fast %K crosses below the slow %D (signal line), it represents
a sell (bearish) signal.
■ (^) Whenever the slow %K crosses above the slow %D (signal line), it represents
a buy (bullish) signal.
■ (^) Whenever the slow %K crosses below the slow %D (signal line), it represents
a sell (bearish) signal.
The stochastic oscillator may be analyzed for buy (bullish) and sell (bearish)
signals using any of the eight forms of oscillator analysis described in a previous
section. Overbought and oversold levels are defaulted at 80 percent and 20 per-
cent, respectively.
Figure 8.23 shows a cycle‐tuned stochastic tracking the tops and bottoms
in Silver with uncanny accuracy. Note that the historical overbought and over-
sold values were used instead of the standard 20 and 80 percent overextension
levels. It is done via visual inspections and it is usually a better reflection of
the behavior of market participants. We may say that when using historically
fIgure 8.23 Cycle‐Tuned Stochastic Tracking Tops and Bottoms Effectively on the
Daily Silver Chart.
Source: MetaTrader 4