The stochastic oscillator was developed by George Lane in 1950. In Stochastic 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. Compared to RSI, the Stochastic indicator has a higher sensitivity to closing prices and keeps more information about price movements.
K = (C-L) / (H-L)*100
K = Lane’s stochastic oscillator
C = the latest closing price
L = the n-period low
H = the n-period high
Stochastic is also useful for identifying overbought and oversold levels.
HOW TO USE STOCHASTIC OSCILLATOR
The Stochastic Oscillator is displayed as two lines. The mainline is called "%K." (fast stochastic - a three-period moving average) and %D (slow stochastic - a three-period simple moving average (SMA) of %K). The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction.
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