Stochastic Oscillator

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technical_indicators:stochastic_oscillator_fast_slow_and_full [2019/09/07 00:20]
betseyp [Stochastic Oscillator Overbought Downturn]
technical_indicators:stochastic_oscillator_fast_slow_and_full [2023/07/20 17:40] (current)
jayanthi [Stochastic Oscillator FAQs]
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 ====== Stochastic Oscillator ====== ====== Stochastic Oscillator ======
  
-===== Introduction ​=====+===== What Is the Stochastic Oscillator? ​=====
  
-Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location ​of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "​doesn'​t follow price, it doesn'​t follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price."​ As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the firstand most importantsignal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. As the Stochastic Oscillator is range-bound,​ it is also useful for identifying overbought and oversold levels. ​+The Stochastic Oscillator is a momentum indicator that shows the speed and momentum ​of price movement. George C. Lane developed ​the indicator in the late 1950s. According to an interview with Lane, the Stochastic Oscillator "​doesn'​t follow price, it doesn'​t follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price."​ As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first and most important signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. As the Stochastic Oscillator is range-bound,​ it is also useful for identifying overbought and oversold levels. ​
  
-===== Calculation ​=====+===== How Do You Calculate the Stochastic Oscillator? ​=====
  
 <​code>​ <​code>​
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 {{:​technical_indicators:​stochastic_oscillator_fast_slow_and_full:​soo-1-ibmexam.png|Stochastics - Chart 1}} {{:​technical_indicators:​stochastic_oscillator_fast_slow_and_full:​soo-1-ibmexam.png|Stochastics - Chart 1}}
  
-===== Interpretation ​=====+===== Interpreting the Stochastic Oscillator ​=====
  
-The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period ​of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10, which is the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. 8 divided ​by 10 equals ​.80 or 80%. Multiply this number by 100 to find %K. %K would equal 30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range, 15 when it was near the bottom and 57 when it was in the middle of the range.+The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period. Assume that the highest high equals 110, the lowest low equals 100and the close equals 108. The high-low range is 10, the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. ​When you divide ​8 by 10 you get 0.80 or 80%. Multiply this number by 100 to find %K. %K would equal 30 if the close were at 103 (0.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range, 15 when it was near the bottomand 57 when it was in the middle of the range.
  
-===== Fast, Slow or Full =====+===== Three Stochastic Versions: ​Fast, Slow, and Full =====
  
-There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lane's original formulas for %K and %D. In this fast version ​of the oscillator, %K can appear rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell." Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic Oscillator (chart 2). +There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lane's original formulas for %K and %D. In this fast version, %K can appear rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell." Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic Oscillator (chart 2). 
  
 {{:​technical_indicators:​stochastic_oscillator_fast_slow_and_full:​soo-2-qqqqfull.png|Stochastics - Chart 2}} {{:​technical_indicators:​stochastic_oscillator_fast_slow_and_full:​soo-2-qqqqfull.png|Stochastics - Chart 2}}
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 {{:​technical_indicators:​stochastic_oscillator_fast_slow_and_full:​soo-9-motbeset.png|Stochastics - Chart 9}} {{:​technical_indicators:​stochastic_oscillator_fast_slow_and_full:​soo-9-motbeset.png|Stochastics - Chart 9}}
  
-===== Conclusion ​=====+===== The Bottom Line =====
  
 While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend. ​ While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend. ​
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 For more details on the syntax to use for Stochastic Oscillator scans, please see our [[https://​support.stockcharts.com/​doku.php?​id=scans:​indicators#​stochastic_oscillators|Scanning Indicator Reference]] in the Support Center. For more details on the syntax to use for Stochastic Oscillator scans, please see our [[https://​support.stockcharts.com/​doku.php?​id=scans:​indicators#​stochastic_oscillators|Scanning Indicator Reference]] in the Support Center.
 +
 +===== Stochastic Oscillator FAQs =====
 +==== What are the different versions of the Stochastic Oscillator? ====
 +There are three versions of the Stochastic Oscillator: Fast, Slow, and Full. 
 +  * The Fast version uses original formulas for %K and %D. 
 +  * The Slow version smooths %K with a 3-day SMA. 
 +  * The Full version is customizable,​ allowing users to set the look-back period, the number of periods for slow %K, and the number of periods for the %D moving average.
 +
 +==== What is a bullish divergence in the Stochastic Oscillator? ====
 +A bullish divergence occurs when the price records a lower low, but the Stochastic Oscillator forms a higher low. This indicates less downside momentum, potentially foreshadowing a bullish reversal.
 +
 +==== What is a bearish divergence in the Stochastic Oscillator? ====
 +A bearish divergence occurs when the price records a higher high, but the Stochastic Oscillator forms a lower high. This signals less upside momentum, potentially indicating a bearish reversal.
 +
 +==== What are Bull/Bear Set-Ups in the context of the Stochastic Oscillator? ====
 +Bull and Bear Set-Ups, identified by George Lane, are another form of divergence used to predict market tops or bottoms. A bull set-up forms when the security creates a lower high, but the Stochastic Oscillator forms a higher high. In contrast, a bear set-up happens when the security forms a higher low, but the Stochastic Oscillator forms a lower low.
 +
 +==== Can the Stochastic Oscillator be used for trending securities? ====
 +
 +While the Stochastic Oscillator is best suited for trading ranges, it can also be used with securities that trend, as long as the trend has a zigzag format. In an uptrend, pullbacks are parts of the zigzag that move higher. In a downtrend, bounces are parts of the zigzag that move lower. A suitable adjustment of the oscillator'​s sensitivity may be needed for these scenarios.
 +
 ===== Further Study ===== ===== Further Study =====