Description
The Stochastic Oscillator is a technical analysis tool used to measure momentum and identify potential trend reversals in financial markets. It was developed in the late 1950s by George Lane, a prominent technical analyst.
Input Parameters
- %K: The current price of the security, represented as a percentage of the difference between its highest and lowest values over a certain time period.
- Slow D: Slow Stochastics which is created by applying a moving average to the %K line, which results in a smoother, less erratic signal.
- Upper: Presets to 80 which represents the upper boundary of the indicator.
- Lower: Presets to 20 which represents the lower boundary of the indicator.
- Price Source: The specific data points (such as open, high, low, or close) from each candle in a financial chart that an indicator uses for mathematical computations, enabling the calculation of metrics like the average over a specified period.
Use Cases
- Overbought and Oversold: The stochastic oscillator ranges from 0 to 100, with readings below 20 indicating oversold conditions and readings above 80 indicating overbought conditions. Traders may use these levels to identify potential trend reversals or areas where the price may stall or reverse.
- Divergences: A bullish divergence occurs when the price of a financial instrument makes a lower low while the stochastic oscillator makes a higher low. This may signal that the downward momentum is weakening and a potential trend reversal is imminent. Conversely, a bearish divergence occurs when the price makes a higher high while the stochastic oscillator makes a lower high. This may signal that the upward momentum is weakening and a potential trend reversal is imminent.
- Crossovers: A bullish cross occurs when the %K line crosses above the %D line, signaling a potential upward price movement. Conversely, a bearish cross occurs when the %K line crosses below the %D line, signaling a possible downward price movement. Traders may use these crosses to initiate long or short positions based on the direction of the cross.
This feature can be used in:
- Market Scanner
- Strategy Tester
- Multi-Factor Alerts
- Smart Checklist
Do you want to learn more? Check out our Learning Center Article.