Stochastic Oscillator (Slow)

Parameters: k_period = 14 (5–21) • k_slowing = 3 (1–5) • d_period = 3 (1–5)

Overview

The Slow Stochastic Oscillator improves upon George Lane's original fast stochastic by incorporating a 3-period moving average to smooth the %K line, effectively making the slow %K equivalent to the fast %D. Lane's key insight was that momentum changes before price, and the stochastic oscillator captures this by measuring where the close sits within the recent trading range. The slow version reduces the choppy signals of the fast stochastic by applying additional smoothing: Slow %K = 3-period SMA of Fast %K, and Slow %D = 3-period SMA of Slow %K.

This double smoothing process significantly reduces false crossovers while maintaining the indicator's ability to identify momentum shifts. The oscillator ranges from 0 to 100, with readings above 80 indicating overbought conditions and below 20 suggesting oversold levels. However, Lane emphasized that the most reliable signals come from divergences between price and the oscillator, and from the pattern of peaks and troughs rather than absolute levels, as securities can remain overbought or oversold for extended periods during strong trends.

Interpretation & Trading Signals

Core Trading Levels:

  • Overbought (> 80): Price may be extended, watch for reversals
  • Oversold (<20): Potential bounce zone, look for bullish signals
  • Mid-Range (50): Neutral momentum, trend continuation likely
  • Extreme Levels (> 90, <10): Strong momentum, trends may persist

Signal Generation:

  • Bull Cross: %K crosses above %D from oversold territory
  • Bear Cross: %K crosses below %D from overbought territory
  • Lane's Divergence: Price/oscillator divergence strongest signal
  • Pop/Drop Pattern: Quick moves from extremes signal reversals

Advanced Techniques:

  • Trend Filter: Only take signals in trend direction
  • Multiple Timeframes: Confirm signals on higher timeframes
  • Volume Confirmation: Strong signals accompanied by volume
  • Pattern Recognition: Double tops/bottoms in oscillator

Example Usage

Code examples will be available once the Rust implementation is complete.

Performance Analysis

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