**What is the Stochastic Oscillator?**

The Stochastic Oscillator is a technical analysis tool created by George Lane in the late ‘50s. The Stochastic Oscillator actually is a momentum indicator that compares current price levels to the High and Low previous price range. The Stochastic Oscillator clearly follows the speed of the momentum. The Stochastic Oscillator aims to indicate price reversals before they actually occur. Additionally, it can be used by traders for identifying overbought price and oversold price levels.

**Stochastic Oscillator Calculation**

- Stochastic Oscillator = 100{(Close – Low14)/(High14 - Low14)} = %D

-Low14 = the lowest of the 14 past periods

-High14 = the highest of the 14 past periods

-%D = 3-period moving average of Stochastic Oscillator

**Stochastic Oscillator Default Settings**

The default setting when using the Stochastic Oscillator is 14 periods (14,3,3). According to each timeframe, Stochastic Oscillator periods may concern daily, weekly, monthly, or even intra-day periods.

**The Use of the Stochastic Oscillator**

The Stochastic Oscillator measures the current price level relative to the highest and to the lowest range for a certain period. It is best used for trading ranges and especially for identifying reversals. Check the following chart of the Stochastic Oscillator (settings 14,3,3,).

Chart: Stochastic Oscillator

**Confirmation of the Stochastic Oscillator**

As the Stochastic Oscillator doesn’t measure important variables as the volume activity, traders may use volume to confirm price reversals. Furthermore, the break of an important support/resistance level can provide reliable confirmation too.

**Identifying Price Reversals**

Stochastic Oversold Reversal:

-The oversold reversal is identified usually when the Stochastic Oscillator has turned up from the levels below 20.

-A bullish divergence occurs with a break of the price of Stochastic Oscillator above 50.

Stochastic Overbought Reversal:

-This reversal is identified usually when the Stochastic Oscillator has turned up from the levels above 80.

-A bearish divergence occurs with a break of the price of Stochastic Oscillator 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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