SFK (Stochastic Fast)

SFK (Stochastic Fast) is a faster version of very popular and widely used Stochastic oscillators. The Stochastic oscillators were developed by George C. Lane in the late 1950s. Besides SFK (Stochastic Fast), the group includes SSD (Stochastic Slow) and STOCHASTIC (Stochastic). What makes SFK 'fast' is minimal smoothing technique used during its calculation (as compared to SSD and STOCHASTIC).

According to George C. Lane, Stochastic is a momentum oscillator that doesn't follow price, it "doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." Hence, it can be added that Stochastic oscillators help to foresee possible trend reversals, too.

A Stochastic oscillator consists of two sets of values:

• %K - compares the closing price of the period, the value of which is being calculated, to the high-low trading range over a specified number of periods. In other words, it measures the level of the closing price of the period relative to the high-low range over a given period of time. Assume that the highest price over the specified number of periods equals 110, the lowest one equals 100, and the closing price of the period being calculated equals 108. The high-low range is 10, which is the denominator in the %K formula. The closing price less the lowest price equals 8, which is the numerator. 8 divided by 10 equals .80 (or 80%). Multiply this number by 100 to find %K.
• %D - is a signal line, which values are calculated by smoothing of %K.

The oscillator is calculated automatically in accordance with certain mathematical formulas (they are provided later in the article). As a result, values of both lines in the range from 0 through 100 are obtained for each period. On a chart, the SFK oscillator is drawn in the form of two lines moving up and down parallel to each other within this range (0 - 100). From time to time, they cross over certain fixed levels and each other. The levels serve determining whether an instrument is overbought or oversold. The lines' crisscrossing can be a trading signal (read later in the article).

A Stochastic oscillator is always drawn in an additional area below the market price chart.

On the following picture, you can see an example of the SFK oscillator (with all its important level lines) drawn in an additional area below the market price chart.



Please remember that the oscillator uses the historical data for its calculation, and all the information it provides belongs to the past. Indicators do not predict the market price future behavior. A trader can only suppose that the past tendencies will continue to develop in the same way for some time in the future and try to use this supposition appropriately.

As a momentum oscillator, SFK suits both ranging and trending markets, provided the trend takes on a zigzag format.

In calculation of the signal %D line, the oscillator employs an additional smoothing technique resulting in its noticeable lagging behind the %K line.

The SFK oscillator works well in company with a bar chart and other indicators, especially trend-following ones.

To apply an SFK oscillator to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see the Add Indicator article.

During the procedure, a trader can customize an indicator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.

The parameters fall into two groups:

• Calculation - the parameters needed to calculate an indicator's prices.
• Style and Appearance - the parameters needed to specify the way an indicator appears on a chart.
• Levels - the parameters needed to specify the values of overbought and oversold levels.

The SFK oscillator has two Calculation parameters:

• Number of periods for %K - the parameter allows to specify the number of periods, over which the %K line is to be calculated. Please note that as the %K line's values are used for calculation of the %D line's ones, the parameter's modification affects the shape of the %D line as well. The possible values are from 2 through 1,000. The default value is 3. The smaller the number is, the more sensitive the oscillator becomes. Its %K and %D lines produce more choppy waves and cross the Overbought and Oversold level lines more often resulting in more frequent trading signals. The greater the number is, the less sensitive the oscillator becomes. Its %K and %D lines are smoother and cross the Overbought and Oversold level lines less often producing fewer trading signals. Traders choose the Number of periods for %K's parameter value in accordance with their need of the level of sensitivity of the oscillator. The recommended and most commonly used values are in the range from 5 through 10 when the oscillator is used together with some other indicators or 14 and 21 when it is used alone.
  
  On the following picture, you can see examples of SFK oscillators with different Number of periods for %K parameter's values (5 and 21).
  
  
  
  
• Number of periods for %D - the parameter allows to specify the number of periods, over which the smoothing technique of the %D line is to be calculated (in Marketscope, it is MVA) when applied to the %K line's values. Please note that the parameter does not affect the %K line and its shape remains intact when the Number of periods for %D' parameter changes. It smooths the %D line causing its lagging behind the %K line. The possible values are from 2 through 1,000. The default value is 5. The smaller the number is, the more sensitive the oscillator's %D line becomes. It produces more choppy waves, stays closer to the %K line, and crosses the Overbought and Oversold level lines more often resulting in more frequent trading signals. The greater the number is, the less sensitive the oscillator's %D line becomes. It is smoother, stays more away from the %K line, and crosses the Overbought and Oversold level lines less often resulting in fewer trading signals. Traders choose the Number of periods for %D's parameter value in accordance with their need of the level of sensitivity of the oscillator's %D line. The recommended and most commonly used value is 5 when the oscillator is used together with other indicators or 8 when it is used alone.
  
  On the following picture, you can see examples of SFK oscillators with different Number of periods for %D parameter's values (5 and 8).
  
  
  
  

The parameters are available on the Parameters tab of the SFK Properties dialog box under the Calculation heading.

The SFK oscillator has several Levels' parameters:

• Overbought level - the parameter allows to specify the threshold, at which an instrument can be considered overbought. The possible values are from 0 through 100. The default value is 80. Traders choose the parameter's values in accordance with their need of the level of the threshold. The recommended and most commonly used value is the default one - 80.
• Oversold level - the parameter allows to specify the threshold, at which an instrument can be considered to be oversold. The possible values are from 0 through 100. The default value is 20. Traders choose the parameter's values in accordance with their need of the level of the threshold. The recommended and most commonly used value is the default one - 20.
• Line levels width - the parameter allows to specify the widths of the Overbought and Oversold level lines, and it works as the Lines width parameter listed under the Style heading on the Parameters tab of the Properties dialog box.
• Line levels style - the parameter allows to specify the styles of the Overbought and Oversold level lines, and it works as the Lines style parameter listed under the Style heading on the Parameters tab of the Properties dialog box.
• Line levels color - the parameter allows to specify the colors of the Overbought and Oversold level lines, and it works as the Lines color parameter listed under the Style heading on the Parameters tab of the Properties dialog box.

On the following picture, you can see how SFK oscillators of different Levels parameter's values (with level lines of different Overbought level and Oversold level values, widths, styles, and colors) look like on a chart.



The parameters are available on the Parameters tab of the SFK Properties dialog box under the Levels heading.

When an SFK oscillator is drawn on a chart, a trader can analyze its information and try to interpret it correctly. SFK produces several trading signals that are identical to those of the STOCHASTIC oscillator.

The SFK oscillator's values are calculated automatically using the following formulas:

%K_i = 100 x (Close_i - Lowest_N) / (Highest_N - Lowest_N)

where:
%K_i - is the oscillator's %K line value of the period being calculated.
Close_i - is the closing price value of the period being calculated.
Lowest_N - is the lowest value of the _N - period time frame (specified by the Number of periods for %K parameter), over which the %K line value is calculated.
Highest_N - is the highest value of the _N - period time frame (specified by the Number of periods for %K parameter), over which the %K line value is calculated.

%D_i = N-period MA of %Ki

where:
%D_i - is the oscillator's signal %D line value of the period being calculated.
N-period - is the number of periods (specified by the Number of periods for %D parameter), over which MA is calculated.
MA - is the MVA indicator.
%K_i - is the oscillator's %K line value of the period being calculated.