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STOCHASTIC

Stochastic oscillator was developed by George Lane in 1950. In Stochastic in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Compared to RSI, Stochastic indicator has a higher sensitivity to closing prices and keeps more information about price movements. 


Calculation:

K = (C-L) / (H-L)*100

K = Lane’s stochastic oscillator

C = the latest closing price

L = the n-period low

H = the n-period high


Stochastic is also useful for identifying overbought and oversold levels.

HOW TO USE STOCHASTIC OSCILLATOR

The Stochastic Oscillator is displayed as two lines. The main line is called "%K." (fast stochastic - a three-period moving average) and %D (slow stochastic - a three period simple moving average (SMA) of %K). The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction.


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