Stochastic Oscillator

Stochastic Oscillator Indicator

A Stochastic Oscillator compares the closing price of an instrument to a range of its prices. This is done during a specific period. The sensitivity of the oscillator to price movements can be changed by adjusting the period that’s used. You can also use a moving average to change sensitivity.

The low for that period is subtracted from the current closing price. This is divided by the total range for that period and multiplied by 100. This type of technical indicator is easy to understand and has a high degree of accuracy, so several traders include it in their analysis.

Calculation of the Stochastic Oscillator Indicator

Four variables are used with the Stochastic Oscillator indicator. These are:

%K periods

%K slowing periods

%D periods

%D method

%K periods refer to the number of time periods that are used in the stochastic formula.

%K slowing periods are values of between 1 and 3, which control the internal smoothing of %K. In this range, 1 is a fast stochastic while 3 is one that is much slower.

%D periods refer to the number of time periods that are used when you’re calculating %K.

%D method refers to the type of method that is used while calculating %D. This can be a smoothed, exponential, weighted or simple method.

%K = (CLOSE-LOW(%K))/(HIGH(%K)-LOW(%K))*100

In the formula above,

CLOSE – is today’s closing price;

LOW(%K) – is the lowest low in %K periods;

HIGH(%K) – is the highest high in %K periods.

The %D moving average is calculated according to the formula: %D = SMA(%K, N)

Where:

N – is the smoothing period;

SMA – is the Simple Moving Average.