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What the Heck Is a “Slow Stochastic” Anyway?

Sean Hyman (June 12, 2009)

Friday, June 12, 2009

FX 101: How to Use the Often Misunderstood “Slow Stochastic”

By Sean Hyman The other day, I showed my FX class a Forex chart with Slow Stochastics on it. Suddenly the questions started pouring. Everyone wanted to know what the heck this “slow stochastic” was and how you use one.

So I wanted to take just a moment and share my answers with you dear reader.

There are actually two types of stochastic indicators: Slow & Fast.

I consider the “fast stochastic” to be the biggest waste of time in Forex trading. It simply whipsaws too much to be effective in choosing price targets or really anything else for your currency pairs. So I say, avoid it if you can.

However, the Slow Stochastic has a lot of value. It’s actually one of my top two indicators that I use quite regularly in my Forex trading. But in order to properly use it, you have to follow a few ground rules.

Check out the chart below and you’ll see what I mean.

Look at the Trend Direction for Best Accuracy!

Here’s How to Use the Stochastic in Uptrends, Downtrends and Sideways Ranges!

The entry signal that you use depends upon the trend direction or lack of it (sideways range).

You see, in a sideways range, you can actually take any signal that it produces. However, it’s when it goes into a trend that it messes many traders up. They pay more attention to the stochastic indicator and less attention to the actual trend direction. This is where they get burned.

Enter your currency pairs ONLY with signals that are “with” the trend direction and not against it.

So now that you know to follow the trend, what constitutes a signal? The stochastic indicator is attempting to assess whether the current price is overbought or oversold in relation to the previous candles that it’s measuring.

I use the 14, 3, 3 settings in particular (but there are other popular settings that can be used too). So my slow stochastic assesses the current price and its relation to the last 14 most recent candles to judge whether a particular currency pair is “overbought” or “oversold”.

Buy signals exist when the two lines go to or below the 20 level and cross and turn upward. (Note: if the lines get fairly close to these levels and turn, it still basically qualifies.) You will see the buy signals on the chart above noted by the green boxes.

Sell signals exist when the lines head upward and go to or above the 80 level and cross over and turn downward. This gives a sell signal. The sell signals are in the red boxed areas.

But remember…don’t just take “any and every signal” to enter your trade. The trend’s direction is always the MOST important thing on your chart. So interpret ALL indicators in light of the trend direction and you’ll be glad you did.

I hope this has helped to demystify the Slow Stochastic indicator. I’ll be back on Monday with more Forex tips, tricks and secrets. Till then…

Have a great weekend,
Sean

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