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Stochastic oscillator is a momentum indicator within technical analysis that uses support and resistance levels as an oscillator. George Lane developed this indicator in the late 1950s.^[1] The term stochastic refers to the point of a current price in relation to its price range over a period of time.^[2] This method attempts to predict price turning points by comparing the closing price of a security to its price range.

The 5-period stochastic oscillator in a daily timeframe is defined as follows:

\%K=100\times {\frac {\mathrm {Price} -\mathrm {Low} _{5}}{\mathrm {High} _{5}-\mathrm {Low} _{5}}}

$\%D_{N}={\frac {\%K_{1}+\%K_{2}+\%K_{3}+...\%K_{N}}{N}}$

where $\mathrm {High} _{5}$ and $\mathrm {Low} _{5}$ are the highest and lowest prices in the last 5 days respectively, while %D is the N-day moving average of %K (the last N values of %K). Usually this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values. There is only one valid signal in working with %D alone — a divergence between %D and the analyzed security.^[3]

Calculation

The calculation above finds the range between an asset's high and low price during a given period of time. The current security's price is then expressed as a percentage of this range with 0% indicating the bottom of the range and 100% indicating the upper limits of the range over the time period covered.^[3] The idea behind this indicator is that prices tend to close near the extremes of the recent range before turning points. The Stochastic oscillator is calculated:

$\%K={\frac {\mathrm {Price} -\mathrm {Low} _{N}}{\mathrm {High} _{N}-\mathrm {Low} _{N}}}\times 100$

$\%D={\frac {\%K_{1}+\%K_{2}+\%K_{3}}{3}}$

Where

\mathrm {Price}

is the last closing price

\mathrm {Low} _{N}

is the lowest price over the last N periods

\mathrm {High} _{N}

is the highest price over the last N periods

\%D

is a 3-period simple moving average of %K,

\mathrm {SMA} _{3}(\%K)

.

\%D\mathrm {-Slow}

is a 3-period simple moving average of %D,

\mathrm {SMA} _{3}(\%D)

.

A 3-line Stochastics will give an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow.^[4] Typical values for N are 5, 9, or 14 periods. Smoothing the indicator over 3 periods is standard.

According to George Lane, the Stochastics indicator is to be used with cycles, Elliott Wave Theory and Fibonacci retracement for timing. In low margin, calendar futures spreads, one might use Wilders parabolic as a trailing stop after a stochastics entry. A centerpiece of his teaching is the divergence and convergence of trendlines drawn on stochastics, as diverging/converging to trendlines drawn on price cycles. Stochastics predicts tops and bottoms.

Interpretation

The signal to act is when there is a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom.^[3] As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.

Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.^[5]

An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.^[6]

Divergence-convergence is an indication that the momentum in the market is waning and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics, relative to price, forecasts a reversal in the price's direction.

An event known as "stochastic pop" occurs when prices break out and keep going. This is interpreted as a signal to increase the current position, or liquidate if the direction is against the current position.^[7]

References

^ "Stochastic Indicator [ChartSchool]". Retrieved 6 October 2014.
^ Murphy, John J. (1999). "John Murphy's Ten Laws of Technical Trading Archived 2012-04-23 at the Wayback Machine".
^ ^a ^b ^c Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.
^ Lane, George C. & Caire (1998) "Getting Started With Stochastics" pg 3
^ Person, John L (2004). A Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators. Hoboken, NJ: Wiley. pp. 144–145. ISBN 0-471-58455-X.
^ Murphy, John J (1999). Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. New York: New York Institute of Finance. p. 247. ISBN 0-7352-0066-1.
^ Bernstein, Jake (1995). The Complete Day Trader. New York: McGraw Hill. ISBN 0-07-009251-6.

External links

[1] "Stochastic Indicator [ChartSchool]". Retrieved 6 October 2014.

[2] Murphy, John J. (1999). "John Murphy's Ten Laws of Technical Trading Archived 2012-04-23 at the Wayback Machine".

[Lane-3] Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.

[4] Lane, George C. & Caire (1998) "Getting Started With Stochastics" pg 3

[5] Person, John L (2004). A Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators. Hoboken, NJ: Wiley. pp. 144–145. ISBN 0-471-58455-X.

[6] Murphy, John J (1999). Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. New York: New York Institute of Finance. p. 247. ISBN 0-7352-0066-1.

[7] Bernstein, Jake (1995). The Complete Day Trader. New York: McGraw Hill. ISBN 0-07-009251-6.

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@@ Line 1: / Line 1: @@
+{{short description|Market momentum indicator}}
-The '''stochastic oscillator''' is a momentum [[Trading Indicator|indicator]] used in [[technical analysis]], introduced by [[George Lane (technical analysis)|George Lane]] in the [[1950s]], to compare the closing price of a commodity to its price range over a given time span.
+'''Stochastic oscillator''' is a [[momentum (technical analysis)|momentum]] [[Technical indicator|indicator]] within [[technical analysis]] that uses [[support and resistance]] levels as an [[Oscillator (technical analysis)|oscillator]]. [[George Lane (technical analysis)|George Lane]] developed this indicator in the late 1950s.<ref>{{cite web|title=Stochastic Indicator [ChartSchool]|url=http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillator_fast_slow_and_full|access-date=6 October 2014}}</ref>  The term ''[[stochastic]]'' refers to the point of a current price in relation to its price range over a period of time.<ref>Murphy, John J. (1999). "[http://stockcharts.com/school/doku.php?id=chart_school:trading_strategies:john_murphy_s_ten_laws John Murphy's Ten Laws of Technical Trading] {{Webarchive|url=https://web.archive.org/web/20120423063619/http://stockcharts.com/school/doku.php?id=chart_school:trading_strategies:john_murphy_s_ten_laws |date=2012-04-23 }}".</ref>  This method attempts to predict price turning points by comparing the closing price of a security to its price range.
+The 5-period stochastic oscillator in a daily timeframe is defined as follows:
-This indicator is usually calculated as:
-:<math>STS = 100 \frac{closing price - price low}{price high - price low}</math>
+:<math>\%K     = 100\times\frac{\mathrm{Price}-\mathrm{Low}_5}{\mathrm{High}_5-\mathrm{Low}_5}</math>
+<math>  \%D_N = \frac {\%K_1+\%K_2+\%K_3+...\%K_N}{N}</math>
-and can be manipulated by changing the period considered for highs and lows.
+where <math>\mathrm{High}_5</math> and <math>\mathrm{Low}_5</math> are the highest and lowest prices in the last 5 days respectively, while %''D'' is the ''N''-day moving average of %''K'' (the last ''N'' values of %''K''). Usually this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values.
-== Interpretation ==
+There is only one valid signal in working with %''D'' alone — a divergence between %''D'' and the analyzed security.<ref name="Lane">Lane, George M.D. (May/June 1984) “Lane’s Stochastics,” second issue of Technical Analysis of Stocks and Commodities magazine. pp 87-90.</ref>
+== Calculation ==
-[[Image:Stochasticspicwiki.gif|350px|frame|right|Stochastics Fast & Slow]]
+The calculation above finds the range between an asset's high and low price during a given period of time.  The current security's price is then expressed as a percentage of this range with 0% indicating the bottom of the range and 100% indicating the upper limits of the range over the time period covered.<ref name="Lane" />  The idea behind this indicator is that prices tend to close near the extremes of the recent range before turning points.  The Stochastic oscillator is calculated:
+<math> \%K = \frac {\mathrm{Price}-\mathrm{Low}_N}{\mathrm{High}_N-\mathrm{Low}_N}\times 100</math>
-The idea behind this indicator is the prices tend to close near their past highs in bull markets, and near their lows in bear markets. Transaction signals can be spotted when the stochastic oscillator crosses its [[moving average (finance)|moving average]].
+<math>  \%D = \frac {\%K_1+\%K_2+\%K_3}{3}</math>
-Two stochastic oscillator indicators are typically calculated to assess future variations in prices, a fast (%K) and slow (%D). Comparisons of these statistics are a good indicator of speed at which prices are changing or the [[Impulse]] of Price.  %K is the same as [[Williams %R]], though on a scale 0 to 100 instead of -100 to 0, but the terminology for the two are kept separate.<ref name="NISE">Prasenjit Yesambare (Ed.),  [http://www.iseindia.com/research/News%20Letter/NISE%20Month%20of%20February%202006.pdf "ISE Capital Market FAQs"], ''[http://www.iseindia.com  NISE: Newsletter of the Inter-connected Stock Exchange of India]'', February, 2006.</ref>
+::''Where''
-The fast stochastic oscillator or Stoch %K calculates the ratio of two closing price statistics: the difference between the latest closing price and the lowest closing price in the last N days over the difference between the highest and lowest closing prices in the last N days:
+:::<math>\mathrm{Price}</math> is the last closing price
+:::<math>\mathrm{Low}_N</math> is the lowest price over the last ''N'' periods
+:::<math>\mathrm{High}_N</math> is the highest price over the last ''N'' periods
+:::<math>\%D</math> is a 3-period [[Moving average (finance)#Simple moving average|simple moving average]] of %''K'', <math>\mathrm{SMA}_3(\%K)</math>.
+:::<math>\%D\mathrm{-Slow}</math> is a 3-period [[Moving average (finance)#Simple moving average|simple moving average]] of %''D'', <math>\mathrm{SMA}_3(\%D)</math>.
+A 3-line Stochastics will give an anticipatory signal in %''K'', a signal in the turnaround of %''D'' at or before a bottom, and a confirmation of the turnaround in %''D''-Slow.<ref>Lane, George C. & Caire (1998) "Getting Started With Stochastics" pg 3</ref>  Typical values for ''N'' are 5, 9, or 14 periods.  Smoothing the indicator over 3 periods is standard.
-: <math>\%K = { CP_{today's} - LOW_{lowestNDays} \over HIGH_{highestNdays} - LOW_{lowestNDays} } \times 100</math>
+According to George Lane, the Stochastics indicator is to be used with [[Business cycle|cycles]], [[Elliott wave principle|Elliott Wave Theory]] and [[Fibonacci retracement]] for timing.  In low margin, calendar futures [[Spread trade|spreads]], one might use Wilders [[Parabolic SAR|parabolic]] as a trailing stop after a stochastics entry.  A centerpiece of his teaching is the divergence and convergence of trendlines drawn on stochastics, as diverging/converging to trendlines drawn on price cycles. Stochastics predicts [[:wikt:top|tops]] and [[:wikt:bottom|bottoms]].
-::'''Where:'''
-::'''''CP''' is closing price''
-::'''''LOW''' is low price''
-::'''''HIGH''' is high price''
-The usual "N" is 14 days but this can be varied. When the current closing price is the low for the last N-days, the %K value is 0, when the current closing price is a high for the last N-days, %K=100.
+== Interpretation ==
-The slow stochastic oscillator or Stoch %D calculates the [[Moving average (finance)#Simple moving average|simple moving average]] of the Stoch %K statistic across ''s'' periods . Usually s=3:
+The signal to act is when there is a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom.<ref name="Lane"/> As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price [[volatility (finance)|volatility]] is high, an [[exponential moving average]] of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.
+Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.<ref>{{cite book |title=A Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators |last=Person |first=John L |year=2004 |publisher=Wiley |location=Hoboken, NJ |isbn=0-471-58455-X |pages=144–145}}</ref>
-: <math>\%D = SMA_3 \; of \; \%K</math>
+[[File:Stochastic-divergence.jpg|thumb|right|250px|Stochastic divergence]]
-or more generally:
+An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.<ref>{{cite book |title=Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications |last=Murphy |first= John J |author-link=John Murphy (technical analyst) |year=1999 |publisher=New York Institute of Finance |location=New York |isbn=0-7352-0066-1 |page=247}}</ref>
+Divergence-convergence is an indication that the momentum in the market is waning and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics, relative to price, forecasts a reversal in the price's direction.
-:<math>\%D_n =  {\sum_{k=0}^s \frac{%K_{n-k}}{s}}. </math>
+An event known as "stochastic pop" occurs when prices break out and keep going. This is interpreted as a signal to increase the current position, or liquidate if the direction is against the current position.<ref>{{cite book |title= The Complete Day Trader |last= Bernstein |first= Jake |author-link= Jake Bernstein |year= 1995 |publisher= McGraw Hill |isbn= 0-07-009251-6 |location= New York |url-access= registration |url= https://archive.org/details/compleatdaytrade0000bern }}</ref>
-The %K and %D oscillators range from 0 to 100 and are often visualized using a line plot.  Levels near the extremes 100 and 0, for either %K or %D, indicate strength or weakness (respectively) because prices have made or are near new N-day highs or lows.
+==See also==
-There are two well known methods for using the %K and %D indicators to make decisions about when to buy or sell stocks. The first involves crossing of %K and %D signals, the second involves basing buy and sell decisions on the assumption that %K and %D oscillate.<ref name="Forex">[http://www.forexrealm.com/ Forex Realm]. Accessed 4 February 2007. <http://www.forexrealm.com/technical-analysis/technical-indicators/stochastic-oscillator.html></ref>
+* [[MACD]]
+* [[Relative strength index|Relative Strength Index (RSI)]]
+* [[Williams %R]] – Equivalent of %K, mirrored around the 0%-axis
+* [[Detrended price oscillator]]
+== References ==
-In the first case, %D acts as a trigger or signal line for %K.  A buy signal is given when %K crosses up through %D, or a sell signal when it crosses down through %D.<ref name="Forex"/>  Such crossovers can occur too often, and to avoid repeated whipsaws one can wait for crossovers occurring together with an overbought/oversold pullback, or only after a peak or trough in the %D line.<ref name="NISE"/> If price volatility is high, a simple moving average of the Stoch %D indicator may be taken. This statistic smooths out rapid fluctuations in price.
+{{reflist}}
+== External links ==
-In the second case, some analysts argue that %K or %D levels above 80 and below 20 can be interpreted as overbought or oversold.  On the theory that the prices oscillate, many analysts including George Lane, recommend that buying and selling be timed to the return back from these thresholds.<ref name="Forex"/><ref name="NISE"/>  In other words, one should buy or sell after a bit of a reversal.  Practically, this means that once the price exceeds one of these thresholds, the investor should wait for prices to return back through those thresholds (e.g. if the oscillator were to go above 80, the investor waits until it falls below 80 to sell).
+* [http://www.investopedia.com/terms/s/stochasticoscillator.asp Stochastic Oscillator at Investopedia]
+* [https://web.archive.org/web/20110520041322/http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillator Stochastic Oscillator at StockCharts.com]
+{{technical analysis}}
-[[George Lane (technical analysis)|George Lane]], a financial analyst from the 1950s is one of the first to publish on the use of stochastic oscillators to forecast prices [https://www.tradestation.com/discussions/topic.aspx?topic_id=9704&Page=3].
-According to Lane you use the stochastics indicator with a good knowledge of "[[Elliot wave|Elliot Wave Theory]]". A Center piece of his teaching is the divergence and convergence of trend lines drawn on stochastics as diverging/ converging to trend lines drawn on price cycles. Stochastics has the power to predict tops and bottoms.
-It should be noted that the existence of price oscillations is hypothetical and statistical at best--stock price movements are a consequence of the actions of human decision-makers and past behavior of market variables does not necessarily predict future behavior.
-== References ==
-<div class="references-small">
-<references/>
-</div>
-*[http://www.onlinetradingconcepts.com/TechnicalAnalysis/Stochastics.html Interpreting Stochastic Buy & Sell Signals; Stochastic Divergences] at OnlineTradingConcepts.com
-*[http://www.investopedia.com/terms/s/stochasticoscillator.asp Stochastic Oscillator at Investopedia]
-*[http://www.chartfilter.com/reports/c44.htm Stochastic Oscillator page] at ChartFilter.com
-*[http://www.stockcharts.com/education/IndicatorAnalysis/indic_stochasticOscillator.html Stochastic Oscillator page] at StockCharts.com
-*[http://www.stator-afm.com/stochastic-oscillator.html Stochastic Oscillator Definition] from Stator-AFM.com
+{{DEFAULTSORT:Stochastic Oscillator}}
 [[Category:Technical analysis]]
+[[Category:Technical indicators]]
-[[pl:Oscylator stochastyczny]]