Stochastic oscillator
The stochastic shows where the closing price sits relative to the high and low of the last few periods, on a scale from 0 to 100.
The idea, by George Lane, is that in an uptrend prices tend to close near their highs and in a downtrend near their lows. Two lines are used: %K and %D, its 3-period average.
How it's calculated
Raw %K = (close − 14-period low) / (14-period high − 14-period low) × 100. In the "slow" version (14, 3, 3), the most widely used, %K is the 3-period average of raw %K and %D is the 3-period average of %K.
Worked example
Over the last 14 days the high is €60, the low €48 and today the stock closes at €57: raw %K is (57 − 48) / (60 − 48) × 100 = 9 / 12 × 100 = 75. If the last three raw %K values are 75, 70 and 59, the slow %K is (75 + 70 + 59) / 3 = 68; %D is the average of the last three slow %K values.
How to read it
Above 80 the stock is considered overbought, below 20 oversold. When %K crosses above %D it's a bullish signal, when it crosses below a bearish one.
Related entries
Put it into practice, risk-free.
Try it with €100,000.00 in virtual money and real prices: free and no credit card needed.