Stochastic Oscillator Momentum Indicator, Forex, Stock Stochastic Oscillator, Stochastic Oscillators

Stochastic oscillator is one another most followed technical momentum indicator by traders trading almost all financial instruments like stock, futures and forex currencies. Stochastic oscillator was developed in late 1950s by George C Lane. It is one of the powerful tools to generate the market divergence signals.

A Stochastic oscillator includes two values as %K and %D each having its value somewhere from 0 to 100. The values are calculated using

%K = 100 x (Closing Price – Lowest Price for N period) / (Highest Price for N period – Lowest Price for N period)

%D = 3-Period Moving Average of %K (That is simply %D is the smoothed form of %K)

Usually the period used is 14 days. The results are plotted as two lines and the alerts are usually generated when %K line crosses that of %D. If the value of %K is above, then the market is considered as overbought; and if the value of %K is below 20, is considered as oversold. A positive divergence is usually confirmed with the second break above 20 and the negative divergence is with second cross below 80.

For more convenience, two types of Stochastic oscillators are used as Stochastic fast and stochastic slow. The %K and %D values of Stochastic fast is determined by the above value. The %K value of the Stochastic slow the %D value of Stochastic fast, and the %D value of Stochastic slow is the 3-period moving average of Slow %K.

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