Stochastic Oscillator

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DEFINITION of 'Stochastic Oscillator'

A technical momentum indicator that compares a security's closing price to its price range over a given time period. The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. This indicator is calculated with the following formula:

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

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.

%D = 3-period moving average of %K

 

Stochastic Oscillator

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BREAKING DOWN 'Stochastic Oscillator'

The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the "%D".

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    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
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    The stochastic oscillator is used to predict reversals in price direction, either through bullish or bearish divergences ... Read Full Answer >>
  3. How does a swing trader use the stochastic oscillator?

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  4. Why is the Williams %R oscillator important for traders and analysts?

    The Williams %R indicator is significant in that is provides evidence of markets which are overbought or oversold and generates ... Read Full Answer >>
  5. What is the difference between Stochastic Oscillator & Stochastic Momentum Index?

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    The most common divergence strategies used in forex trading look to profit when there is divergence between price movement ... Read Full Answer >>
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