Stochastic Oscillator, Technical Indicators, Knowledge Base

Introduction

Oscillator is a technical analysis software that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold.

There are two versions of the Stochastic Oscillator available on SharpCharts.

Fast Stochastic Oscillator

It is based on George Lane's original formulas for %K and %D. %K in the fast version that appears rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell."

Slow Stochastic Oscillator

It was introduced to reflect this emphasis. The Slow Stochastic Oscillator smoothes %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Two stochastic oscillator indicators are typically calculated to assess future variations in prices, a fast (%K) and slow (%D). Comparisons of these statistics are a good indicator of speed at which prices are changing or the Impulse of Price. %K is the same as Williams %R, though on a scale 0 to 100 instead of -100 to 0, but the terminology for the two are kept separate.

Formula

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) *100
%D = 3-day SMA of %K Lowest Low = lowest low for the look-back period Highest High = highest high
for the look-back period %K is multiplied by 100 to move the decimal point two places

Advantage

The stochastic oscillator is a momentum indicator used in technical analysis of stocks, to compare the closing price of a commodity to its price range over a given time span.