Description:
The Double Smoothed Stochastic, developed by Dr. Alexander Elder, refines the traditional stochastic oscillator by employing two smoothing processes. It begins by calculating the %K line using the standard stochastic formula, comparing the current closing price to the high and low prices over a specified period. This %K line is then smoothed once to generate %K1 and smoothed again to produce the Double Smoothed Stochastic. This double smoothing minimizes short-term noise, offering traders a clearer picture of the underlying trend's strength. Typically utilized to identify overbought and oversold conditions or to generate buy/sell signals, it enhances the reliability of momentum and trend analysis in technical trading strategies.
Input Parameters
- Length: Number of periods used in the calculation.
- Smooth: The smooth line is usually 5, and the number of periods used for smoothing.
- Signal: Represents the smoothed oscillation of price momentum, aiding in identifying potential trend reversals or continuation points in the market with the default being 5.
- Overbought: The number that indicates the Double Smoothed Stochastic's value has risen significantly, potentially signaling that the asset's price may have climbed too high, too quickly.
- Oversold: The number indicates that the Double Smoothed Stochastic's value has decreased significantly, suggesting that the asset's price may have dropped too low, too rapidly.
- MA Type: Select the moving average type such as EMA, SMA, or HullMA.
Use Cases
- Identifying Overbought and Oversold Conditions: The Double Smoothed Stochastic helps traders identify overbought conditions (indicating potential reversals downward) when the indicator rises above a certain threshold (e.g., 80) and oversold conditions (indicating potential reversals upward) when it falls below a threshold (e.g., 20).
- Generating Buy and Sell Signals: Traders utilize crossovers and divergences of the Double Smoothed Stochastic with its signal line or with price action to generate buy signals when it crosses above its signal line or rises from overrsold territory and sell signals when it crosses below its signal line or falls from overbought territory.
- Confirming Trend Strength: Traders use the Double Smoothed Stochastic to confirm the strength of a trend, interpreting its movements in overbought or oversold territory during uptrends or downtrends to assess bullish or bearish momentum and potentially confirm trend continuation.
This feature can be used in:
- Market Scanner
- Strategy Tester
- Multi-Factor Alerts
- Smart Checklist
Do you want to learn more? Check out our blogpost.