The stochastic oscillator is one of the most recognized indicators used for determining a stock’s momentum. The term "stochastic" relates to the location of a stock’s current price in comparison with its price range over a specified period of time.
It is a common acceptance that when the price of a stock closes near the highs of its trading range, it is an indicator that the stock is in an uptrend. Likewise, when it closes near the lower range of its trading range, the stock is believed to be suffering a downturn in momentum. Traders typically use the stochastic oscillator to predict turning points in the price by comparing the closing price of a security with its associated price range.
Stochastic Oscillator Technical Analysis
The stochastic oscillator is ranges between zero and 100. When the value is 80 or above it signifies overbought conditions. The analyzed security is considered oversold when the stochastic oscillator is at 20 or below.
Understanding the Stochastic Oscillator
The stochastic oscillator is comprised of two lines, the %K, which is the raw measure used to formulate the idea of momentum behind the oscillator and the %D, which is simply a moving average of the %K. Of these two lines, the %D is the more important as it produces better signals.
Most technical traders use stochastic oscillator technical analysis to calculate the momentum of a stock over its past 14 trading periods, but the indicator can be adjusted to meet the needs of the individual doing the analyzing.
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