FXS - Stochastics

Name:
FXS-Stochastics
Characteristic:
Momentum
Parameter Defaults:
Length
14
Plots:
PercentK

PercentD

Overbought
80

Oversold
20
Stochastics were created by George Lane in the 1950’s and have become a popular momentum indicator due to the apparent simple nature of its overbought/oversold signals. There are two versions of Stochastics – Fast and Slow. George Lane did provide full rules as to when to use Stochastics but many find these rather difficult to apply. Essentially the basic element of Stochastics is the Percent K line. This is derived from a simple formula that measures the relative position of the current price in percentage terms against the recent range. Percent D is a form of average of Percent K and Percent Slow D is another average of Percent D.
Another use of Stochastics is the crossover of the faster line across the slower. (%K through %D and %D through %SlowD) One of the distracting features of Stochastics, particularly the Fast Stochastic, is the number of occasions when the two lines cross, providing apparent bullish and bearish signals. All too often there is no follow through and the crossover provides a false signal.
FXS-Stochastics provides a smoother Stochastic with fewer crossovers, and therefore fewer false signals.

Usage

The chart shows the 10-minute bar chart of USDCHF in the middle of February 2003. All three forms of Stochastics are plotted and it can be seen that the standard Fast Stochastic is constantly suffering crossovers of PercentK through PercentD, even to the extent of being almost every bar during the sideways consolidation around 15:30 – 17:30. The Slow Stochastic does reduce the number of signals. But at the far left, at the start of the data series both Fast and Slow Stochastics can be seen moving higher and lower without reflecting price action that well. At the same time, FXS-Stochastics provided a consistent bullish trend to price and avoided the confusion caused by the standard indicators.
This same situation occurred to the right of the chart, also, as FXS-Stochastics indicated the basic bearish direction of price.

Another feature of FXS-Stochastics is that it has been developed to cause less crossovers in trending markets, times when standard momentum indicators traditionally fail. Note how in the daily GBPJPY market FXS-Stochastics held positive throughout the entire move while the standard Slow Stochastics caused a series of crossovers.
One point to appreciate is that to accommodate the feature of less whipsaws the indicator is slower than the standard version and is not totally suited to finding peaks and troughs. However, with an integrated analytical methodology the smoother features help in identifying the underlying price direction.

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