When should you use a fast or slow Stochastics indicator? Before that question is answered, you have to understand the difference between the two types of Stochastics. The fast Stochastic is the original indicator developed by Dr. George Lane and is intended to compare the closing price of a security to its price range for a particular time period. By doing so, the trader hopes to identify the direction of a trend, with prices closing near to their high indicating an upward trending market while in a downward trending market, prices generally will close near their low.
The Stochastics indicator consists of two lines. The %K line is the main line of the indicator and consists of the ratio of the closing price minus the lowest low of the period and the highest high less the lowest low of the period. The %D line acts as a signal line for the %K line and a trading signal is revealed when the two lines cross over. The two lines can be charted within a range of zero to 100. Bullish or bearish trading signals can be formed. Bullish signals are formed when the two lines drop below 20 and rise up again while bearish signals when the lines go up beyond 80 and drop down again. A bullish signal indicates that the exchange rate is going to go up while a bearish signal that it will go down.
However, the problem with the fast indicator is that many traders believe it is too choppy and may not produce accurate signals. In order to compensate for the choppiness, the slow indicator was created. The slow Stochastic uses a three-period moving average to make the movements of the %K line smoother. Because of the way the fast Stochastic is computed, there are more crossovers but the signals are less powerful. On the other hand, a slow Stochastic has fewer crossovers but they are more powerful trading signals. And you may also want to use another technical indicator, such as the Moving Average Converge-Divergence (MACD) in order to confirm the signals that you get from the Stochastics indicator.
Because of the strong signals, the slow Stochastics indicator is appropriate for most types of currency traders, whether they are long-term or short-term. On the other hand, if you are a scalper who specializes in making a series of quick trades to make small profits that add up over time, then you’ll like fast Stochastics because there are more crossovers and thus, more trading opportunities. However, a Stochastics indicator can also generate crossovers within what is called the ‘mid-range’ between 80 and 20. While these also produce trading signals, it is still a matter of contention between traders as to whether or not they should react to them. If you are a scalper, then you may want to do some quick trades. On the other hand, if you would like to generate higher profits, you may simply choose to bide your time and wait for a bullish or bearish trading signal to emerge.