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Applies a moving average to %K, exposing smoothed momentum direction and providing a crossover reference that filters erratic oscillator movement.
Stochastic %D is a moving average of the Stochastic %K line. It acts as a signal line, and crossovers with %K are used to identify turning points.
Stochastic %D is a 3-period simple moving average of the %K line, creating a smoothed signal line that reduces noise and generates trading signals through crossovers. While %K shows raw momentum, %D provides a filtered version that helps confirm momentum shifts and identify higher-probability trading opportunities when the two lines interact.
The %D calculation:
%D = 3-period SMA of %K
Stochastic variations:
- Fast Stochastic: Raw %K with %D as 3-period SMA of %K
- Slow Stochastic: %K is 3-period SMA of Fast %K; %D is 3-period SMA of Slow %K
- Full Stochastic: Customisable periods for both smoothing stages
Why %D matters:
- Signal generation: %K/%D crossovers trigger trades
- Noise reduction: Smooths out %K fluctuations
- Confirmation: Validates %K movements
- Trend filter: %D direction indicates momentum trend
Trading signals:
- Bullish crossover: %K crosses above %D; buy signal
- Bearish crossover: %K crosses below %D; sell signal
- Best signals: Crossovers in extreme zones (below 20 or above 80)
Signal quality:
- Oversold bullish cross: %K crosses above %D below 20; strong buy signal
- Overbought bearish cross: %K crosses below %D above 80; strong sell signal
- Mid-range crosses: Weaker signals; more prone to whipsaws
Interpreting %D:
- %D rising: Momentum improving; bullish bias
- %D falling: Momentum weakening; bearish bias
- %D at extremes: Extended conditions that may reverse
Divergence with %D:
- Bullish divergence: Price lower low, %D higher low
- Bearish divergence: Price higher high, %D lower high
- Significance: Divergences often precede reversals
Limitations:
- Lagging: Smoothing delays signals compared to %K
- False signals: Still susceptible to whipsaws
- Trending markets: Can stay overbought/oversold in trends
%D transforms the raw %K into a more tradeable indicator. Most traders use %K and %D together, with crossovers in extreme zones providing the highest-probability signals.