# Stochastic Oscillator

## What is the 'Stochastic Oscillator'

The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Next Up

## BREAKING DOWN 'Stochastic Oscillator'

The stochastic oscillator is calculated using the following formula:

%K = 100(C - L14)/(H14 - L14)

Where:

C = the most recent closing price

L14 = the low of the 14 previous trading sessions

H14 = the highest price traded during the same 14-day period

%K= the current market rate for the currency pair

%D = 3-period moving average of %K

The general theory serving as the foundation for this indicator is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low. Transaction signals are created when the %K crosses through a three-period moving average, which is called the %D.

## History

The stochastic oscillator was developed in the late 1950s by George Lane. As designed by Lane, the stochastic oscillator presents the location of the closing price of a stock in relation to the high and low range of the price of a stock over a period of time, typically a 14-day period. Lane, over the course of numerous interviews, has said that the stochastic oscillator does not follow price or volume or anything similar. He indicates that the oscillator follows the speed or momentum of price. Lane also reveals in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences. This signal is the first, and arguably the most important, trading signal Lane identified.

## Overbought vs Oversold

Lane also expressed the important role the stochastic oscillator can play in identifying overbought and oversold levels, because it is range bound. This range â€“ from 0 to 100 â€“ will remain constant, no matter how quickly or slowly a security advances or declines. Considering the most traditional settings for the oscillator, 20 is typically considered the oversold threshold and 80 is considered the overbought threshold. However, the levels are adjustable to fit security characteristics and analytical needs. Readings above 80 indicate a security is trading near the top of its high-low range; readings below 20 indicate the security is trading near the bottom of its high-low range.

RELATED TERMS
1. ### Oscillator

A technical analysis tool that is banded between two extreme ...
2. ### Chande Momentum Oscillator

A technical momentum indicator invented by the technical analyst ...
3. ### Williams %R

In technical analysis, this is a momentum indicator measuring ...
4. ### OsMA

An abbreviation for Oscillator - Moving Average. OsMA is used ...
5. ### StochRSI

An indicator used in technical analysis that ranges between zero ...
6. ### Overbought

1. A situation in which the demand for a certain asset unjustifiably ...
Related Articles

### Stochastics: An Accurate Buy And Sell Indicator

Find out how stochastics are used to create buy and sell signals for traders.

### Combined Forces Power Forex Snap Strategy

Stochastic and MACD oscillators can help isolate greater opportunities in range-bound markets.

### How Do You Use the Stochastic Oscillator?

A stochastic oscillator is a technical momentum indicator that compares a security's closing price to its price range over a given time period.

### Beginner's Guide To Stockcharts.com: Indicators

Indicators are calculations based on price and volume history of a ticker. There are many different indicators, each with a unique formula used to measure such things as volatility, momentum, ...

### MACD And Stochastic: A Double-Cross Strategy

The stochastic oscillator and the moving average convergence divergence (MACD) are two indicators that work well together.

### Do You Have The Right Settings On Your Stochastic?

Use these helpful tips to unlock Stochastics' full potential.

### Premier Stochastic Oscillator Explained

This oscillator has been used since the 1950s by traders and investors to anticipate areas where the market may change direction.

### Know the Forces At Play Behind The Buy/Sell Cycles

Weekly Stochastics uncovers patterns of buying and selling pressure that can be predicted and capitalized upon by observant investors and traders.

### Technical Analysis: Indicators And Oscillators

By Cory Janssen, Chad Langager and Casey MurphyIndicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. ...
10. Markets

### Use The Percentage Price Oscillator: The "Elegant Indicator" For Picking Stocks

Technical analysis is basically an attempt to disprove the credo that "Past performance is not indicative of future results." The percentage price oscillator, which measures momentum, is among ...
RELATED FAQS
1. ### How do I read and interpret an Stochastic Oscillator?

Understand the basics of the stochastic oscillator and how analysts and traders use this measure of trend momentum to predicts ... Read Answer >>
2. ### What are the best technical indicators to complement the Stochastic Oscillator?

Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
3. ### What is the difference between Stochastic Oscillator & Stochastic Momentum Index?

Discover how the stochastic oscillator and the Stochastic Momentum Index differ and why the latter is considered a more refined ... Read Answer >>
4. ### What precisely is a stochastic oscillator meant to predict?

Gain a basic understanding of the stochastic oscillator and how this technical indicator is designed to predict reversals ... Read Answer >>
5. ### How can a business eliminate deadweight loss from government regulation?

Understand the basics of the stochastic oscillator and how to use this momentum metric in tandem with other indicators to ... Read Answer >>
6. ### How do I use Stochastic Oscillator to create a forex trading strategy?

Learn about the stochastic oscillator and how to it is used to create an effective forex trade strategy, including how to ... Read Answer >>
Hot Definitions
1. ### Sell-Off

The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
2. ### Brazil, Russia, India And China - BRIC

An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
3. ### Brexit

The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
4. ### Underweight

1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
5. ### Russell 3000 Index

A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
6. ### Enterprise Value (EV)

A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...