Stochastic Oscillator

The Stochastic Oscillator is an important tool of technical analysis.

What is it?

The Stochastic Oscillator is a measure of momentum. It shows the location of the

current closing price, relative to the high/low range over a defined

number of periods. Closing levels that are consistently near the top of

the range indicate buying pressure; and those near the bottom of the

range indicate selling pressure. Since %K is a percentage, or ratio,

its values fluctuate between 0 and 100.

How can it make me a better investor

Investors use the Stochastic Oscillator to spot buy and sell signals. While technical analysis is not a fool proof method, it can provide insightful mathematical information to inform your decision process.

Use the Stochastic Oscillator as a technical indicator

Generally,values of the oscillator below 20 are considered oversold. Values above 80 are considered overbought. When a divergence from these overbought or oversold levels develop, a buy/sell signal is given. For example, once the oscillator reaches overbought levels, a trader should wait for a negative divergence to develop and cross below 80. Upon a second dip below 80 the trader is given the sell signal. For a buy signal, once the oscillator reaches an oversold level a trader would wait for a positive divergence moving above 20 once. A second break above 20 confirms the divergence and gives the buy signal. See the above image for a visual example of possible signals.

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