Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a period of time. The period of time for which the stochastic oscillator is calculated is used to adjust the sensitivity of the oscillator to market movements.

KEY TAKEAWAYS

• A stochastic oscillator is a popular technical indicator for generating overbought and oversold signals.
• It is a popular momentum indicator, first developed in the 1950s.
• Stochastic oscillators tend to vary around some mean price level, since they rely on an asset’s price history.

Example Of How To Use The Stochastic Oscillator

The stochastic oscillator is included in most charting tools and can be easily employed in practice. The standard time period used is 14 periods, though this can be adjusted to meet specific analytical needs. The stochastic oscillator is calculated by subtracting the low for the period from the current closing price, dividing by the total range for the period and multiplying by 100. As a hypothetical example, if the 14-day high is $150, the low is $125 and the current close is $145, then the reading for the current session would be: (145-125)/(150-125)*100, or 80.