Stochastic - Slow Indicator

Description:

The Stochastic Slow indicator is an oscillator which indicates overbought and oversold conditions in the market. It is based on the premise that during periods of price decreases, bar closes tend to accumulate near the low of the bar. During periods of price increases, bar closes tend to accumulate near the high of the bar.

Conventional Analysis:

A signal is generated when any plot lines cross.

Additional Analysis:

Some traders prefer the slow stochastic, which is smoothed by means of a moving average technique, instead of the fast stochastic, which is not smoothed. The fast stochastic, as the slow stochastic, generates two lines: %K and %D.

The area above 75 or 80 is usually said to be overbought, while the area below 20 is usually said to be oversold. The developer, Dr. Lane, believes the most important signal is a divergence between %D and the commodity; that is, the condition when %D makes a series of lower highs while the commodity makes a series of higher highs. This signals an overbought market. An oversold market occurs when the commodity posts a series of lower lows while %D makes a series of higher lows.
When either of these patterns occur, you should anticipate a signal. You can initiate a position when the %K crosses the %D from the right-hand side (when the %D has either bottomed or topped and is moving higher or lower when the %K crosses the %D line). Dr. Lane believes that the most reliable trades occur when the %D is between 10 and 15 for a buy, and between 85 and 90 for a sell.

Additional References:

Lane, Dr. George C. "Using Stochastics, Cycles & R.S.I. ...to the Moment of Decision".