The stochastic oscillator is one of the most recognized momentum indicators used in technical analysis.
The idea behind this indicator is that in an uptrend, the price should be closing near the highs of the trading range, signaling upward momentum in the security.
In downtrend, the price should be closing near the lows of the trading range, signaling downward momentum.
The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20.
The stochastic oscillator contains two lines.
The first line is the %K, which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D, which is simply a moving average of the %K.
The %D line is considered to be the more important of the two lines as it is seen to produce better signals.
The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user.
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