- July 20, 2023
- Posted by: CoachShane
- Categories: Trading Article, Trading Indicators
The Double Smoothed Stochastic Oscillator is a technical indicator used in trading. It offers a smoothed version of the traditional stochastic oscillator, providing a more refined and less volatile signal. Traders utilize it to identify overbought and oversold conditions and generate buy and sell signals.
If you’re a trader looking for a technical analysis tool to help you make trading decisions, the Double Smoothed Stochastic Indicator (DSS) might be just what you need.
What Is A Double Smoothed Stochastic Oscillator?
Created by William Blau, this indicator applies exponential moving averages to a standard Stochastic %K and offers a much smoother curve than the raw Stochastic. It can be used to analyze market trends, identify overbought and oversold regions, and spot divergences.
The concept behind the DSS is simple: it combines two different periods of exponential moving averages with the standard Stochastic %K to create a more accurate and reliable indicator. The smoothed components are then used to calculate the DSS, which ranges from 0 to 100.
Unlike the traditional stochastic oscillator, which can produce choppy signals in volatile markets, the DSS offers traders a smoother and more responsive way to interpret market data.
How Is It Different From The Traditional Stochastic Oscillator?
The standard Stochastic Oscillator uses a simple moving average (SMA) to calculate %K. However, the Double Smoothed Stochastic Indicator (DSS) applies exponential moving averages (EMAs) of two different periods to standard Stochastic %K.
The smoothed components are then plugged into the standard Stochastic formula to calculate DSS, which ranges from 0 to 100 like the traditional oscillator.
DSS vs Stochastic Oscillator
|Double Smoothed Stochastic
|Traditional Stochastic Oscillator
|Offers a much smoother curve than the raw Stochastic
|Raw Stochastic can exhibit more jagged movements
|Overbought: Above 70
|Overbought: Above 70
|Oversold: Below 30
|Oversold: Below 30
|Sell Signal: DSS crosses below 70 after being above it
|Sell Signal: %K crosses below %D
|Buy Signal: DSS crosses above 30 after being below it
|Buy Signal: %K crosses above %D
|Bullish Divergence: Lower low in price, higher low in DSS
|Bullish Divergence: Lower low in price, higher low in %K or %D
|Bearish Divergence: Higher high in price, lower high in DSS
|Bearish Divergence: Higher high in price, lower high in %K or %D
What Is The Concept Behind The DSS?
The concept behind the double-smoothed stochastic oscillator involves using exponential moving averages of two different periods to create a much smoother curve than the raw stochastic. This allows traders to analyze market trends and make informed trading decisions.
The formula for this indicator is the EMA of the (EMA of the (Close – Lowest Low for the specified period)) divided by EMA of the (EMA of the (Highest High for the specified period – Lowest Low for the specified period)) X 100.
To be more precise about how this indicator is calculated, here are the specific formulas or steps involved in this process:
- Take the highest high and lowest low for a specified period (usually 14 bars)
- Calculate their difference and apply an exponential moving average (EMA) to each of them using two different periods (usually 3 and 8 bars)
- Divide EMA(EMA(Close – Lowest Low)) by EMA(EMA(Highest High – Lowest Low)) and multiply by 100
- Plot these values on a chart as an oscillator ranging between 0 and 100
- Interpretation: above 70 indicates overbought conditions; below 30 indicates oversold conditions
Bullish divergence forms when price makes a lower low, but the double-smoothed stochastic oscillator forms a higher low. Conversely, bearish divergence forms when price makes a higher high, but the oscillator forms a lower high.
By paying attention to these divergences along with overbought and oversold levels, traders can use this tool to help them make profitable trading decisions.
Key Signals To Watch For
The interpretation and significance of the DSS indicator can be determined by analyzing changes in trend direction and buy/sell signals based on overbought/oversold levels or divergences in price action.
Here’s what to consider when interpreting the DSS:
- When the oscillator’s above 70/80, it suggests the asset’s overbought and may experience a bearish reversal soon
- When the oscillator’s below 20/30, it implies the asset’s oversold and may experience a bullish reversal
A crossover above 70 followed by a crossover back below 70 indicates a sell signal. Conversely, a crossover below 30 followed by a crossover back above 30 indicates a buy signal. Divergences occur when there’s disagreement between price action and the oscillator, which could indicate an impending trend change.
By paying attention to these signals and the trend, traders can make decisions about entering or exiting positions. No single indicator should be used in isolation and that market conditions are always subject to change. Using a trade trigger is advisable.
Advantages Of Using The Double-Smoothed Version
If you want a more polished and refined curve for your indicator, using the Double Smoothed Stochastic may offer advantages over the traditional version.
One of the main benefits of using the DSS is that it helps filter out some of the noise present in a standard stochastic oscillator. By applying two exponential moving averages to the formula, it creates a smoother line that is easier to read and interpret.
Another advantage of using the DSS is that it can help traders identify potential trend reversals with greater accuracy. This is because the double smoothing process allows for better differentiation between true price movements and random fluctuations in price.
Additionally, by incorporating divergences into your analysis, you may be able to spot bullish or bearish signals earlier than you would with a traditional stochastic oscillator.
Overall, if you’re looking for an indicator that provides clearer signals and lessens market noise, adding the Double Smoothed Stochastic to your trading toolbox may be worth considering.
Frequently Asked Questions
What is the double smoothed stochastic?
Double smoothed stochastic is a technical indicator used in trading to analyze price momentum. It applies multiple levels of smoothing to the stochastic oscillator, providing a smoother representation of price movements and identifying potential overbought or oversold conditions.
What are smooth K and smooth D lines?
Smooth K and Smooth D are components of the stochastic indicator used in trading. Smooth K is a smoothed version of the %K line, while Smooth D is a moving average of the Smooth K line.
What is considered the most effective strategy for using the stochastic oscillator?
The most effective strategy for using the stochastic oscillator varies depending on market conditions and individual preferences. It often involves identifying overbought and oversold levels, along with bullish or bearish divergences.
What is the formula for calculating the double stochastic indicator?
The formula for calculating the double stochastic indicator involves applying the stochastic calculation twice: first to the raw data, then to the resulting %K line. The specific formula may vary depending on the trading platform or system being used.
You now have a solid understanding of the Double Smoothed Stochastic Oscillator and how it differs from the traditional Stochastic Oscillator. By applying exponential moving averages of two different periods to a standard Stochastic %K, the DSS offers a much smoother curve that can be used to analyze market trends and make trading decisions.
One key advantage of using the double-smoothed version is its ability to identify overbought and oversold regions, as well as divergences. Traders can interpret the readings of the DSS and watch for key signals or patterns to make informed decisions about when to enter or exit trades.
Overall, incorporating this tool into your technical analysis strategy may help enhance your ability to generate profitable trades by providing a clearer view of market trends and potential opportunities.