Stochastic oscillator

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:

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

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

where ${\displaystyle \mathrm {High} _{5}}$ and ${\displaystyle \mathrm {Low} _{5}}$ 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]