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Trading and Investment Terms

Stochastic Oscillator

The Stochastic Oscillator is an indicator that allows for huge versatility in trading. It was developed by George C. Lane in the late 1950s and is one of the most popular indicators used in Forex, indices, and stock trading.

 

We can use the Stochastic indicator for the following activities and purposes:

  • Divergence
  • Day trading
  • Scalping
  • Buy/Sell confirmation
  • Confirmation of overbought/oversold
  • Daily swing method with Admiral Pivot

The basic premise of the indicator is that momentum precedes the price, so the Stochastic Oscillator, being a momentum indicator, could signal the actual movement just before it happens.

 

he Stochastic Oscillator is measured using the %K and %D lines

  • %K = 100 [(C – L14) / (H14 – L14)]
  • C is the current closing price
  • L14 is the lowest price when looking back at the 14 previous trading sessions
  • H14 is the highest price when looking back at the 14 previous trading sessions
  • %K tracks the most recent market rate for the currency pair
  • %D = 3-period simple moving average (SMA) of %K. It is also called the 'stochastic slow' due to its slower reactions to market price changes, as compared to %K.