Stochastic Oscillator

Developed by George C. Lane in the late 1950sd, The Stochastic Oscillator is comparing the price of the market in relevance to the price range over a specific period. Developed by George C. Lane in the late 1950sd, The Stochastic Oscillator is comparing the price of the market in relevance to the price range over a specific period.

Why should I use it?

The Stochastic Oscillator can generate buy and sell signals in different ways.
It can point out when the market is possibly overbought, or oversold - signaling a sell or a buy accordingly.
It can signal a change in the market's direction as the %k line crosses over the %D (Explained below).
In addition, you can use the Stochastic Oscillator with the Divergence strategy introduced on the MACD indicator page.

How does it look like?

The Stochastic Oscillator is composed out of two lines:
The first is the %k line, which is the main line of the indicator.
The second is the %D line - which is the dashed line in the chart.
The %D line is a moving average of the %K line calculated in periods to your choice.
The two lines can get values between 0 and 100.

How does it work?

As an overbought/oversold indicator - you can consider any move of the Stochastic Oscillator above the level 80, as an indication the market is overbought, a sell signal is then triggered the next time the Stochastic is crossing back the 80 level form above downwards.
You can consider any move of the Stochastic Oscillator below the level 20 as an indication the market is oversold, a buy signal is then triggered the next time the Stochastic crosses back the level 20 from below upwards.
Crossover signals:
You can also regard the crossing of the solid %K over the dashed %D line as buy or sell signals in the following way:
When the solid line (%K) crosses the dashed line (%D) from below upwards it will indicate a buy signal.
When the solid line (%K) crosses the dashed line (%D) from above downward it will indicate a sell signal.
Divergence Strategy:
The Stochastic Oscillator can also be used with the very affective Divergence Strategy, you can learn all about this strategy on the introduction page for the MACD indicator.

Example

In this example the EUR/GBP is gradually trading up, until the price tops on Sep 4. The Stochastic Oscillator is then well above the oversold level 80, when it finally moves under 80 it triggers a sell signal just in time, before the market corrects downwards.