Improving Fast Stochastic Setups

FastStoch for NT8

The Fast Stochastic is a momentum indicator developed by George Lane. On momentum, Lane is quoted as saying: “If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price.“ Therefore, the concept is to spot situations where a momentum fall-off may predict a trend reversal. To learn more, watch the video or continue reading below:

As with the standard Stochastic Oscillator (also developed by Lane), the Fast Stochastic compares the closing price with the range in the lookback period. The range is defined by values from 0 to 100 and is then used to measure trend strength and possible trend reversals. If values move below the 20 threshold, the market is trading near the bottom of its high-low range and can be interpreted as oversold. Conversely, values above 80 show that the market is trading near the top of its high-low range and may be overbought. The overbought / oversold thresholds can be adjusted to fit the characteristics of the market you trade.

Fast Stochastic for NT8

Fast Stochastic Calculation

As can be seen above, the Fast Stochastic indicator is made up of two lines, namely the %K and %D lines. The %K is the main line, drawn as a solid line and calculated as follows:

  • C = Current Price
  • L = Period Low
  • H = Period High

The second is the %D line and is a moving average of %K and drawn as a dotted line. The two lines may be used to identify setups, long when fast moves above slow and short when fast moves below slow in the oversold / overbought areas.

Bullish and Bearish Divergence

Lane’s approach was to look for a divergences between price and the overbought / oversold thresholds. In an oversold scenario, he would check to see if the %K had fallen below%D and look for divergence in the movement of %K and the latest price action low. If prices have set a new low and the %K rises, it may indicate a possible long setup. For entries, exits may then be considered at crosses above the 80 threshold.

Fast stochastic bullish divergence

In an overbought scenario, you would check if the %K has crossed abovethe %D line and look for divergence in the movement of %K and the latest price action high. If prices have moved higher, whereas the %K line is falling, it may signal a short setup. Exits may then be considered at crosses below the 20 threshold.

Fast stochastic bearish divergence

Nested Indicators

Of course, both the standard Stochastic and Fast Stochastic Oscillators are available with the default NinjaTrader installation. However, these and a few other indicators cannot be used with any other input series than price. In other words, some of the NinjaTrader in-built indicators do not allow for nesting, as you may not create a custom nested indicator by applying them to any other indicator. We have therefore created a separate Nested Indicators in our Library.

All indicators in this category return the same values as the system indicators when applied to price. In addition, you may select any other indicator as input series and thus build specific custom nested indicators.

Using a different input than price may be useful for a variety of reasons. For example, you may want to correct distortions in fixed scale Fast Stochastics overbought / oversold readings. As shown in the chart below, adjustments to the oversold threshold may be required in order to identify long setups during a strong uptrend.

Distortion in Fast Stochastics Thresholds

Correcting Threshold Distortions

By instead using the Roofing Filter as input series for the Fast Stochastic indicator, distortions in the fixed scale overbought / oversold readings may be corrected. You may then rely on the fixed scale 20/80 levels without manually adjusting according to the current trend scenario. This Roofing Filter was presented by John Ehlers with his MESA Stochastics indicator, to eliminate short and long wave components. In brief, the Roofing Filter only considers wave components whose periods are between 10 and 48 bars. As a result, it may significantly reduce oscillator lag and more accurately assess turning points

Correcting Fast Stochastic Thresholds

Other Nested Indicators

Other indicators from the Nested category include the ADX, ADXR, ATR, CCI, Directional Movement, Directional Movement Index, Double Smoothed Stochastics (Blau), Double Smoothed Stochastics (Bressert) and the Parabolic SAR. A number of other normalized Indicator Library oscillators may also applied to the Roofing Filter.

To download the Fast Stochastics indicator for NinjaTrader 8, please follow the below link: