The Stochastic Oscillator is a momentum indicator used in technical analysis that compares a particular closing price of a security to a range of its prices over a certain period of time. This is typically expressed as a percentage from 0 to 100.
The main idea behind the Stochastic Oscillator is that in an upward-trending market, prices will be closing near their highs, and in a downward-trending market, they will be closing near their lows. By comparing the location of a security’s recent closing price in relation to its price range over a selected time period, traders can identify potential trend reversals and generate buy or sell signals.
There are two lines in a Stochastic Oscillator; the %K line represents the number of time periods and the %D line is a moving average of the %K line. When these two lines intersect, it indicates a buy or sell signal.
A Stochastic Oscillator value above 80 is generally considered a sign that the market may be in overbought territory, suggesting prices might soon decline. Conversely, a value below 20 suggests the market might be oversold, which could indicate potential for a price increase in the near future. This is a basic method of interpretation, and there are many different strategies and subtleties when using this tool in technical analysis.
