The
Stochastic Oscillator is a momentum indicator that shows the location
of the current close relative to the high/low range over a set number
of periods. Closing levels that are consistently near the top of
the range indicate accumulation (buying pressure) and those near
the bottom of the range indicate distribution (selling pressure).
The
stochastic indicator is:
The Stochastic
Oscillator was developed by George C. Lane. It is a momentum indicator
that shows the location of the current close relative to the high/low
range over a set number of periods. Closing levels that are consistently
near the top of the range indicate accumulation (buying pressure)
and those near the bottom of the range indicate distribution (selling
pressure).
%K is fast stochastic
oscillator where as %D is slow stochastic oscillator.
%K compares the latest closing price to the recent trading range
%D is a signal line calculated by smoothing %K which is 3-period
moving average of %K
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 "%D".
The reading
below 20 is considered as oversold & above 80 is considered
overbought.
According to Lane some of the best signals occurred when the oscillator
moved from overbought territory back below 80 and from oversold
territory back above 20.
Usage:
It
is as a buy/sell signal generator, buying when fast moves above
slow and selling when fast moves below slow. Most traders use
the Slow Stochastics because of its more reliable signals

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