Stochastics: About the three lines

Issues regarding the three lines of Stochastic

“D set as the 3-day moving average of %K, Slow%D set as the 3-day moving average of %D. How many days at minimum does %K need to stay at 100 for Slow%D to reach 100?”

In the previous article, I wrote about the essence of stochastic

“Is it true that Stochastic cannot be used?”

Considering that both %D and Slow%D are based on %K, the core of this problem should become clear.

This problem is easier to solve not by thinking but by using concrete tables and charts.

In my usual articles, I post the solution right away, but I’ll explain first.

Explanation

%K is defined as: when the range between the latest high and the latest low is 1, what percentage position is the price relative to the low.

Originally, %D should be calculated by taking into account the difference in the high-low range when averaging data.

To illustrate with a concrete example.

When averaging two data points,

If A is 30% and B is 90%, intuitively the average would be 60%, but if the amounts of A and B differ, the result changes.

In an elementary school class, the number of boys in Group A is 6 out of 20

and Group B is 72 out of 80

What percentage of all boys in the two groups is that?

In this situation, the average is not 60%; it is 78 out of 100, i.e., 78%.

Rephrasing to Stochastic terms,

Suppose one day %K is 30% and the next day %K is 90%.

If you set %D as the 2-day moving average of %K, it won’t simply be 60%; for example,

If the range of the highest minus the lowest on one day is 20 yen
and the range on the next day is 80 yen

Similar to the class example,

Day 1: 20 yen × 30% = 6 yen
Day 2: 80 yen × 90% = 72 yen

Therefore, the two-day average is (6 + 72) ÷ 100 = 0.78 = 78%

When prices rise sharply, the high price is updated and the range between high and low also increases, so this is a possible case.

%D is the moving average of %K.

MACD's signal is the moving average of the MACD line.

MACD is something that foretells the future

The difference is that MACD is the difference between two EMAs, so its unit is a numeric value (like yen). Therefore it is acceptable to simply average the signals.

However, since the unit of %D in Stochastics is a percentage of %K, you must not simply multiply and divide them.

Up to here, I have explained what %D is with lengthy concrete examples.

Back to the topic.

The answer to the problem is not that “the 3-day moving average of 3 days equals a 9-day average” as you might guess after reading this far.

For Slow%D to reach 100, %D must be at 100 for at least 3 days.

%D reaches 100 when %D has been at 100 for at least 3 days.

(If everything is at 100 or 0, you can average without considering the range)

So, in a diagram, it looks like this.

S%D stands for Slow%D.

For example, if %K hits 100 from day 1 to day 3, then on day 3, %D will be 100.

If from day 3 to day 5, %D hits 100, then on day 5 S%D will be 100.

Answer

“%K must be at 100 for at least 5 days.”

What this problem shows is that S%D is hard to push to exactly 100 or 0. The same applies to 90 or below 10.

%K moves quickly, so using S%D as well helps in judging the market, making Stochastic more usable.

Although the letters K, D, S are arranged in a way that can be confusing,

the meaning is: %K is the baseline, %D is a moving average, and S%D is an even averaged value.

From the explanation so far, it would seem that to analyze the market you only need to use %K and S%D, but some tools cannot display them independently.

%K, %D, and S%D can be displayed independently in some systems, but in MT4 there is a parameter called throwing.

Regarding the ways to use Stochastic lines,

・First Stochastic → use %K and %D
・Slow Stochastic → use %D and S%D

In the chart system parameters

[ %K, %D, Slow Throwing ],

If Throwing is 1, it becomes First Stochastic

If Throwing is 2 or more, it is Slow Stochastic.

For example, [26, 3, 1] means

%K period is 26 days
%D is the 3-day moving average of %K

%K and %D are displayed

[5, 4, 3] means

%K period is 5 days
%D is the 4-day moving average of %K
S%D is the 3-day moving average of %D

%D and S%D are displayed

Displaying S%D to reduce false signals is fine, but since the meaning is unclear when averaged over averages and %K is the baseline, you would still want to use First Stochastic.

Therefore, don't just use the chart system's default settings; try adjusting the parameters.

Recommended usage is [26, 9, 1].

The baseline of the Ichimoku chart is the average of the high and low over the past 26 days, so setting %K's period to 26 makes 50% of %K align with the baseline.

Also, making %D the 9-day moving average of %K aligns with the 9-day moving average commonly used for MACD signals, so I adjusted it accordingly.

Then it becomes quite easy to analyze.

Next time, I will discuss trading strategies using Stochastic.