The stochastic oscillator was developed in the late fifties by George Lane. It is an oscillator which shows momentum in a commodity by comparing the current days close to the high/low ranges over a specified amount of days. Consistent closings near the higher side of the range indicates buying pressure while a close consistently on the lower side of the range indicates weakness and selling pressure. It shows whether a commodity is overbought or oversold. The calculation of the formula is as follows:
%K = (Recent Close-Lowest Low (n) / Highest High (n) Lowest Low (n)) x 100
%D = 3 period moving average of %K
And (n) = the number of periods used for calculations
Hence, a 20 day stochastic oscillator would take the most recent close, the highest high of the last 20 days as well as the lowest low of the last 20 days. The general time period used here is the 14 time period. These formulas are given here for clarification only. One rarely ever needs to calculate these values manually, as the software used for charting will automatically plot it straight on your commodities chart.
Stochastic Oscillator – How Do We Use It?
Essentially,...
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