Stochastic Oscillator: Analysis, Calculation, and Trading Application

Introduction to the Stochastic Oscillator

The Stochastic Oscillator is a popular technical analysis indicator used to assess the momentum of a financial asset's price. Developed by George Lane, it is classified as an oscillator, meaning its values oscillate within a fixed range (from 0 to 100).

The Stochastic Oscillator compares the closing price of an asset to the range of its prices over a specified period.

Purpose of the Stochastic Oscillator

The Stochastic Oscillator is used to identify overbought or oversold conditions in a market, which can indicate potential trend reversals. It is particularly useful for predicting turning points and assessing whether an asset is excessively bought or sold.

How to Calculate the Stochastic Oscillator

The calculation of the Stochastic Oscillator involves several steps:

Measurement Period:  The standard period for calculating the oscillator is 14 days, but it can be adjusted based on the analyst's preference.

%K (Fast Stochastic):  Calculate the %K value as the ratio of the difference between the closing price and the lowest price over the period to the difference between the highest and lowest prices over the period.

%D (Slow Stochastic):  Calculate the %D value as the simple moving average of the %K…