When it comes to fast stochastic, the following events are recognised;
For a bullish potential to be seen, the %K and %D lines will have to first fall below the 20 threshold before rising above it once more. When the %K line crosses above the %D line, this will trigger a bullish signal if they occur within a certain time period - five days.
On the other hand, bearish potential will begin once the two lines rise above the 80 threshold before dropping below after. When the %K line crosses below the %D line, this will trigger a bearish signal if they occur within the five-day period.
As we can see above, the fast stochastic compares two lines - %K and %D. After assessing and comparing these two, the possibility of a downtrend or an uptrend can be predicted. Normally, the %D line will be presented as a dotted line whilst the %K line appears as a bolder, thicker line. When evaluating daily, weekly, or even monthly periods, this is a great oscillator to use.
According to many reports, it was George Lane who first developed this oscillator with the basic idea of the closing prices falling during a downtrend. However, the price tend to move towards the top of the price range for the time period as the trend matures with the opposite being true for an uptrend.
It should be noted that there is a distinct difference between slow and fast stochastic oscillators and this can be seen in the way that they are calculated. Ultimately, many traders believe slow stochastic to be the more reliable of the two because they are based on the moving averages that are first calculated for fast stochastic.
When it comes to fast stochastic, the formula for %K is as follows;
%K - 100 [(C-L)/(H-L)]
In this scenario, C is the value of the most recent closing price for the stock, L is the lowest price for the stock over a set period of time, and H describes the highest price for the stock over the same time period. Generally, a 14-day time period is used and recognised.
On the other hand, the %D value is calculated using a three periods moving average of the %K value itself. If you want to remember the difference between the two, many traders use the following - K means ‘Kwick’ and D means ‘Dawdle’. Although this seems incredibly simple, its simplicity should actually allow you to remember it well.
Normally, the %D line is a lot slower to react than the %K line. However, there are times when the opposite is true and this is normally the first signal for a slow Reversal.