George Lane developed stochastics, an indicator that measures the relationship between an issue's closing price and its price range over a predetermined period of time.

Fourteen is the mathematical number used in the time model, and it can, depending on the technician’s goal, represent days, weeks, or months. The chartist may want to examine an entire sector. For a long-term view of a sector, the chartist would start by looking at 14 months of the entire industry’s trading range. (For more insight on chart reading, see Charting Your Way To Better Returns.)

Price Action
The premise of stochastics holds that a stock’s closing price tends to trade at the high end of the day’s price action. Price action is the prices at which a stock traded throughout the daily session. The stock may have opened at $10.00, traded as low as $9.75 and as high as $10.75, and closed at $10.50 for the day. The price action then of this example is between $9.75 (the low of the day) and $10.75 (the high of the day). If the issue, however, is currently in a downtrend cycle, the closing prices will tend to close at or near the low of the trading session.
Jack D. Schwager, the CEO of Wizard Trading and author of some the best books written on technical analysis, uses the term "normalized" to describe stochastic oscillators that have predetermined boundaries both on the high and low sides. An example of such an oscillator is the relative strength index (RSI) which has a range of 0-100, and are set at either the 20-80 range or the 30-70 range. Whether your looking at a sector or an individual issue, it can be very beneficial to use stochastics and the RSI in conjunction with each other. (For more, see Ride The RSI Rollercoaster and Exploring Oscillators and Indicators: RSI.)

Formula
Stochastics is measured with the %K line and the %D line, and it is the %D line that we follow closely, for it will indicate any major signals in the chart. Mathematically, the %K line looks like this:

%K = 100[(C – L5close)/(H5 – L5)]

C = the most recent closing price
L5 = the low of the five previous trading sessions
H5 = the highest price traded during the same 5 day period.

The formula for the more important %D line looks like this:

%D = 100 X (H3/L3)