Stochastic oscillator information

In technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels. George Lane developed this indicator in the late 1950s.^[1] The term stochastic refers to the point of a current price in relation to its price range over a period of time.^[2] This method attempts to predict price turning points by comparing the closing price of a security to its price range.

The 5-period stochastic oscillator in a daily timeframe is defined as follows:

\%K=100\times {\frac {\mathrm {Price} -\mathrm {Low} _{5}}{\mathrm {High} _{5}-\mathrm {Low} _{5}}}

$\%D_{N}={\frac {\%K_{1}+\%K_{2}+\%K_{3}+...\%K_{N}}{N}}$

where $\mathrm {High} _{5}$ and $\mathrm {Low} _{5}$ are the highest and lowest prices in the last 5 days respectively, while %D is the N-day moving average of %K (the last N values of %K). Usually this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values. There is only one valid signal in working with %D alone — a divergence between %D and the analyzed security.^[3]

^ "Stochastic Indicator [ChartSchool]". Retrieved 6 October 2014.
^ Murphy, John J. (1999). "John Murphy's Ten Laws of Technical Trading Archived 2012-04-23 at the Wayback Machine".
^ Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.

[1] "Stochastic Indicator [ChartSchool]". Retrieved 6 October 2014.

[2] Murphy, John J. (1999). "John Murphy's Ten Laws of Technical Trading Archived 2012-04-23 at the Wayback Machine".

[Lane-3] Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.

Stochastic oscillator information

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