Exploring Oscillators and Indicators: Stochastic Oscillator
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
The stochastic oscillator is another wellknown momentum indicator used in technical analysis. The idea behind this indicator is that the closing prices should predominantly close in the same direction as the prevailing trend.
In an upward trend the price should be closing near the highs of the trading range and in a downward trend the price should be closing near the lows of the trading range. When this occurs it signals continued momentum and strength in the direction of the prevailing trend.
The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line is the %K which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D which is simply a moving average of the %K. The %D line is considered to be the more important of the two lines as it seen to produce better signals.
The stochastic oscillator generally uses the past 14 trading periods in the calculation but can be adjusted to meet the needs of the user.
Calculation
There are three versions of the stochastic oscillator fast, slow and full. The purpose of each version of the stochastic is to smooth the oscillator and help remove some of the randomness. The fast stochastic oscillator is the basic version of the indicator and is the one represented by the above equations. The slow and full stochastics smooth the data that is provided by the raw data given in the fast stochastic. Both of these oscillators reflect the same period and plot two lines.
Slow Stochastic:
The number of periods used in calculating the slow %D can be adjusted to meet the user's needs.
Full Stochastic:
Stochastic Signal Generation
The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction.
Divergence can also be used to formulate buyâ€“andsell signals. When looking for divergence the %D line is the one most used as it gives clearer signals due to its smoothed nature. A divergence signal is formed when the %D and the security move away from one another, signaling a weakening of the trend.
If the security is moving in an upward direction and the %D is moving in a downward direction this is a bearish sign. A bullish sign is formed when the %D is moving upward when the security is moving downward. If this divergence is happening when the %D is in an overbought (above 80) or an oversold (below 20) position on the oscillator the signal formed is much stronger. However, the signal is not considered complete until the %K line crosses the %D line in the opposite direction of the price trend.
The stochastic oscillator is a little more difficult to calculate compared to other technical indictors but none the less it is one of the more commonly used indicators. The indicator can be adjusted to any time frame but is normally set to equal 14 periods.

Stochastic Oscillator
A technical momentum indicator that compares a security's closing ... 
Oscillator
A technical analysis tool that is banded between two extreme ... 
StochRSI
An indicator used in technical analysis that ranges between zero ... 
Signal Line
A moving average plotted alongside a technical indicator and ... 
OsMA
An abbreviation for Oscillator  Moving Average. OsMA is used ... 
Stochastic Modeling
A method of financial modeling in which one or more variables ...

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 >> 
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 >> 
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 >> 
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 >> 
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 >> 
What are the differences between Relative Strength Index (RSI) & Stochastic Oscillator?
Learn about some of the main differences between the relative strength index and the stochastic oscillator, two wellknown ... Read Answer >>