## The Many Applications of the Moving Average – Part 7 (of 7)

\ 9:36 PM EST \ June 26th, 2012

## 7) “Smoothing Out” other Indicators ie. Stochastic Oscillator:

The construction of the Ichimoku shows that we don’t have to use the MA of the close price. In fact if you think about what the moving average really is, it is simply a look at a series of data and smooths them out. Therefore, another use of the MA is to smooth out not only price data, but indicator data. For example, the stochastic oscillator uses a smoothing out process in its calculation:

Here is the formula as well as an image of the stochastic oscillator copied from the FXTimes glossary:

When plotted on a chart, the indicator is usually plotted as 2 lines: %K and %D. %K is the main (fast) line and %D is the signal (slow) line.

A component of the stochastic formula is as follows:

Fast %K = ((Today’s Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) * 100
%D = 3-period simple moving average of Fast %K (This basically smooths out the Fast%K line)

The stic Oscillator is calculated by the formula:

Fast %K = ((Today’s Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) * 100
Slowing %K = N-period moving average of Fast %K
%D = N-period simple moving average of Slowing %K

You can see in the example that the “full” stochastic has a smoother, rounder path, while the “fast” stochastic has a more jagged one.

Note: technical indicators are all derived from price data.

In construction of other indicators:

Fan Yang CMT is the Chief Technical Strategist FXTimes – provider of x News, Analysis, Education, Videos, Charts, and other trading resources.

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