Using the Slow Stochastic Indicator in Commodity Markets
In this video, Richard Adcock, a Technical Analyst at Corellian Academy, demonstrates how Slow Stochastics indicator, a momentum-based tool, can be applied to trading.
Using overbought and oversold readings, the indicator pinpoints turning points in market activity and tends to be particularly useful in sideways trading ranges.
Slow Stochastics usually default to a 14-day period, but Adcock prefers a 10-day period for more responsive signals. A market with overbought conditions (above 70%) may indicate potential sell-offs, while a market with oversold conditions (below 30%) may ignore overbought/oversold signals.
By examining gold as an example of a sideways trading range, Adcock demonstrates the indicator's effectiveness. Overbought and oversold readings within a range provide reliable signals for a correction. When a market is trending strongly, especially to the upside, overbought signals tend to get ignored, so an indicator that turns higher becomes more important.
In order to determine the overall trending condition, moving average convergence divergence ("MACD"), an indicator that can measure momentum and directional risk, is introduced. Slow stochastics could be used to complement MACD from timing aspect. When momentum rises within an uptrend, it means further upside is likely, emphasizing the importance of understanding directional risk within the market.
In conclusion, the Slow Stochastics indicator may be useful for timing trade entries, especially within sideways ranges. Although it excels in detecting overbought and oversold conditions within such ranges, in trending markets, it is essential that indicators like MACD be used to consider the overall trend. Within a confirmed trend, momentum turning higher is more critical than overbought/oversold readings, indicating the trend might be reaccelerating.
