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, stochastic setups are used in 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), theFast 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, theFast 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
Improving Fast Stochastic Setups

The second is the %D line and is a moving average of %K and drawn as a dotted line. You may use the two lines to identify fast stochastic setups. You may identify long setups when the fast line moves above slow in the oversold area. Conversely, short setups when fast moves below the slow in the overbought.

Fast Stochastic Setups and Divergence

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

Fast stochastic bullish divergence

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

Fast stochastic bearish divergence

Nested Indicators

Of course, both the standard stochastic andFast 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. Specifically, you may not use certain NinjaTrader in-built indicators for nesting, as they cannot be applied to another 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 stochastic overbought / oversold readings. As shown in the chart below, adjustments to the oversold threshold may be required in order to identify longfast stochastic setups during a strong uptrend.

Distortion in Fast Stochastics Thresholds

Correcting Threshold Distortions

By using the Roofing Filter as input series for theFast Stochastic indicator, distortions in the fixed scale overbought / oversold readings can be eliminated. 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 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 theFast Stochastic oscillator for NinjaTrader 8, please follow the below link:

Tutorials and Templates 

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Improving Fast Stochastic Setups