Stochastic Oscillator
The Stochastic Oscillator Technical Indicator compares where a security’s price closed
relative to its price range over a given time period. The Stochastic
Oscillator is displayed as two lines. The main line is called %K. The
second line, called %D, is a Moving Average of %K. The %K line is usually
displayed as a solid line and the %D line is usually
displayed as a dotted line.
There are several ways to interpret a Stochastic Oscillator. Three popular methods include:
Buy when the Oscillator (either %K or %D) falls below a specific level
(for example, 20) and then rises above that level. Sell when the Oscillator rises
above a specific level (for example, 80) and then falls below that level;
Buy when the %K line rises above the %D line and sell when
the %K line falls below the %D line;
Look for divergences. For instance: where prices are making a series of
new highs and the Stochastic Oscillator is failing to surpass its previous highs.
Calculation
The Stochastic Oscillator has four variables:
%K periods. This is the number of time periods used in the stochastic calculation;
%K Slowing Periods. This value controls the internal smoothing of %K. A value of
1 is considered a fast stochastic; a value of 3 is considered a slow stochastic;
%D periods. his is the number of time periods used when calculating a moving average of %K;
%D method. The method (i.e., Exponential, Simple, Smoothed, or Weighted) that is used to calculate %D.
