Explanation: DV Double Super-Smoothed Double Stochastic Oscillator
I have gotten a few questions regarding my reasoning for using a double stochastic. I try to avoid getting too technical most of the time, and spare readers the dry explanations for my indicator refinements, but in this case things are simpler to appreciate. The stochastic in its typical form is not per se an overbought/oversold oscillator because it in fact is just a simple measure of where the current price is relative to its highs measured in terms of the length of the stochastic–which in this case is 10 days. Most traders are aware that stochastics–unlike RSI and other oscillators—spend most of their time at peaks and valleys. Additionally, stochastics tend to completely top or bottom out as new price highs and lows are made even in quiet conditions. This makes it difficult to 1) differentiate trend from exhaustion points and 2) know when to use a signal.
Taking the 2nd stochastic of the 1st stochastic is simply taking a measure of where the current stochastic reading is in relation to the past. Thus the double stochastic is now a de-trended oscillator which now mainly takes into account the cyclicality of price movement for the underlying stock or index. For example, if the 1st stochastic rarely went below 50, then the double stochastic would convert 50 to a value close to zero to account for the fact that this is a relative low. The same thing applies with persistently high numbers. The additional smoothing also helps to slow down the signals and reduce error. The resulting indicator looks almost like a sine wave, which is exactly what it is supposed to do. Using further technical refinements and more complex math, one can actually derive a lot of information about cycles and create price projections using the double stochastic. But that is beyond the scope of this article.