Stochastic Oscillator

Type

Momentum Indicator

History

Developed by George C. Lane in the late 1950s

How does it work?

Stochastic shows the current close price relative to the high/low range over a set number of periods.

Closing levels that are consistently at the top of the range indicate accumulation (buying pressure), above 80 indicates the stock is overbought. 

Closing levels that are consistently at the bottom of the range indicate distribution (selling pressure), below 20 indicates the stock has been oversold.

It is quite a popular indicator for intra-day and end of day traders, as it is intended to be traded for the short- term.

What is %K and %D?

The Stochastic Oscillator is displayed as two lines. The main line is called "%K." The second line, called "%D," is a moving average of %K. The %K line is displayed as a solid line and the %D line is displayed as the dotted line within Sharechart.

Settings

ShareChart Default: 14

Example

Below is the graph for the Dow Jones Industrial Average Index.  The Stochastic Oscillator shows the overbought and oversold points in the market. Some traders wait for the K and D lines to cross up from below a reading of 20 (oversold) as a buy signal. When the K and D lines cross down from above 80 (overbought) traders see this as a possible sell signal.

To change the above setting, go to Settings>Indicators>Stochastic Oscillator. The above setting was 20 period.