What is the Stochastic Oscillator?

⚙️ What is the Stochastic Oscillator?

The Stochastic Oscillator is a technical analysis tool developed by George Lane in the late 1950s. It is a momentum indicator that compares the current price level to the recent high and low price range. The oscillator tracks the speed of momentum and aims to signal price reversals before they happen. It is also commonly used to identify overbought and oversold price levels.

 

Stochastic Oscillator Calculation

The Stochastic Oscillator is calculated as:
Stochastic Oscillator = 100 × [(Close – Low14) / (High14 – Low14)] = %K

  • Low14 is the lowest price over the past 14 periods

  • High14 is the highest price over the past 14 periods

  • %D is the 3-period moving average of %K

 

Stochastic Oscillator Default Settings

The default setting for the Stochastic Oscillator is 14 periods (14,3,3). Depending on the timeframe, these periods can represent daily, weekly, monthly, or even intraday intervals.

 

The Use of the Stochastic Oscillator

The Stochastic Oscillator measures the current price level relative to the highest and lowest prices over a specific period. It is most effective for trading in range-bound markets and especially for identifying potential reversals. Refer to the following chart of the Stochastic Oscillator with settings (14,3,3).

Chart: Stochastic Oscillator

 

Confirmation of the Stochastic Oscillator

Since the Stochastic Oscillator does not account for factors like volume, traders often use volume to confirm price reversals. Additionally, a breakout of a significant support or resistance level can serve as reliable confirmation.

 

Identifying Price Reversals

📈 Stochastic Oversold Reversal:

  • This reversal is typically identified when the Stochastic Oscillator turns upward from levels below 20.

  • A bullish divergence occurs when the Stochastic Oscillator breaks above 50.

📉 Stochastic Overbought Reversal:

  • This reversal is usually identified when the Stochastic Oscillator turns downward from levels above 80.

  • A bearish divergence occurs when the Stochastic Oscillator breaks below 50.

 

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🔗 Read More: » What is Williams %R | » What is Pivot Point | » What is RSI | » What is MACD  | » What are Round Numbers? | » What is the Fibonacci Retracement | » Technical Analysis Map

 

◘ What is the Stochastic Oscillator?

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