# Stochastic Oscillator

The Stochastic Oscillator uses closing prices in comparison with highs and lows of current trading ranges to indicate the trend of price movements. There are multiple methods for using the Stochastic Oscillator as a trading signal.

# Stochastic Oscillator

The **Stochastic Oscillator** uses closing prices in comparison with highs and lows of current trading ranges to indicate the trend of price movements. There are multiple methods for using the Stochastic Oscillator as a trading signal, including Stochastic Crossover and Stochastic Divergence.

## Stochastic Oscillator Formula

The fast oscillator, k, consists of summing multiple days worth of comparisons between the daily closing price and multiple days of high and low prices. The slow oscillator, d, is typically the average of a 3 period sum of k. Required input parameters are: (1) the period over which the high and low prices will be calculated for comparison with today's close; (2) The summing period for k; and (3) The averaging period for d.

## Application of Stochastic Oscillator

The premise behind the Stochastic Oscillator is that the stock will close at the upper end of a given period's trading range when the price is trending upward and that the stock will close at the lower range during downtrends. Peaks of the Stochastics Oscillator indicate potentially overbought positions, while minimum values of the oscillator indicate potentially oversold positions. Entry (Buy) signals are generated when the Stochastic Oscillator %k rises above the 20% line, while exit (sell) signals are generated when the Stochastic Oscillator %k falls below the 80% line.