What is the Stochastic Oscillator
Oscillators are momentum indicators that measure the „speed“ of price movements, indicating how
quickly prices are rising or falling. They are particularly useful in three situations:
- When the oscillator value reaches an extreme level near the upper or lower boundaries.
- When there is a divergence between the oscillator and the price action.
- When the oscillator crosses a zero line or a midpoint.
Stochastic Oscillator
The stochastic oscillator is a momentum indicator that compares a security’s closing price to its price
range over a specific period. It ranges between 0 and 100, signalling overbought conditions above 80
and oversold conditions below 20. Crossovers between the filled and dashed lines are used similarly
to moving average crossovers.
In technical analysis, the stochastic oscillator is used to identify support and resistance levels.
Promoted by Dr. George Lane in the 1950s, it focuses on the current price’s location relative to its
range over time. The indicator predicts price turning points by comparing closing prices to the price
range, with prices typically closing near extremes before turning points. In an uptrend, prices usually
make higher highs, and the closing price tends to be at the upper end of the trading range. As
momentum slows, closing prices retreat from the upper boundaries, causing the stochastic indicator
to turn down, often before the final price high. Divergence-convergence indicates waning momentum
and a potential market reversal.