Stochastic Oscillator a momentum indicator
BY Chris Andreou
|January 14, 2021The Stochastic Oscillator compares where a price has closed relative to its price range over a given period.
- Displayed as two lines
- Main Line is called %K, and the second line is called %D and is a moving average of %K
- Produces Buy and Sell signals as well as warning signals when a trend may be about to end
Theory behind the indicator is that prices tend to close near the upper end of a trading range during an uptrend.
- As the trend matures, the tendency for prices to close away from the high of the session becomes more pronounced
- In a downward move, the reverse would hold true
- Ranges from 0% to 100%
- Reading of 0% shows prices closed at lowest level during the preceding x-time periods.
- 100% shows prices closed was the highest price during the preceding x-time periods.
Interpretation
- “BUY” when %K, %D fall below 20 and then rise above 20.
- “BUY” when %K rises above %D.
- “Sell” when %K, %D rise above 80 and fall below 80.
- “Sell” when %K, falls below %D.
- Look for divergences
- “BUY” when %K, %D fall below 20 and then rise above 20.
- “BUY” when %K rises above %D.
- “Sell” when %K, %D rise above 80 and fall below 80.
- “Sell” when %K, falls below %D.
Conclusion:
A Momentum indicator that attempts to measure the points in a rising or falling trend.
- Buy / Sell signals generated on crossovers
- Look for Divergences for signs of a trend reversal
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