Stochastic oscillator

From Financial Literacy Wiki

Stochastic oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane promoted this indicator in the 1950s. The term stochastic refers to the location of a current price in relation to its price range over a period of time. This method attempts to predict price turning points by comparing the closing price of a security to its price range.

The method is based on the belief that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the "%D"

%K is calculated by the following formula:

%K = 100[(C - Ln)/(Hn - Ln)]

where

C is the most recent closing price.
L is the lowest price of the period of n days.
H is the highest price of the period of n days.

%D is the average of %K for 3 periods.