Stochastic (Indicator)

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. The Stochastic oscillators indicate overbought and oversold areas in the market, based upon momentum or price velocity. The Stochastic Classic indicator calculates the location of a current price in relation to its range over a period of bars.

Calculations

Stochastic are made up of four individual calculations: FastK, FastD, SlowK, SlowD. The core of the calculations are based upon the FastK value that is calculated in the following manner.

FastK(Length) = (C - L)/(H - L)*100

Where

L = Lowest Low of a specified period

H = Highest High of a specified period

C = Today’s Close

Length = Specified period of time

FastD is an exponential average of FastK. SlowK is also an exponential average of FastD. SlowK equals the FastD. SlowD is an exponential average of FastD.

Default Parameters

AT uses Slow %D

Price value is Close

Length is defaulted to 10

Usage

Stochastic indicator mainly used as an oscillator for choppy markets.

Overbought/Oversold: The Stochastic oscillators indicate overbought and oversold areas in the market, based upon momentum or price velocity. Normally, below 20% is called oversold zone, and over 80% is called overbought zone.

Crossover: %K crossing above the smoother %D can be a buy signal and vice versa. A value greater than 80 is usually used as an overbought signal and a value less than 20 is used for the oversold signal. The 80 value is often called the sell zone and the 20 value is called the buy zone. The crossover of the buy zone and sell zone values in conjunction with a %D and %K crossover is a good indication of a switch in trend direction.

George C. Lane, developer of the Stochastic, says the only valid signal derived from the %D is a divergence from the price where the divergence is an indication of a trend reversal. When using the %K and the %D together, crossovers of the two generate valid signals and should be used to indicate rising and declining markets.

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