The Stochastic Oscillator is actually momentum indicator. Stochastic can help figure out time when currency is oversold or overbought. Considering that the oscillator is actually used over the past 50 years, it has stood the test of the time, that the is the big reason why several traders apply it today. The Stochastic Oscillator “doesn’t follow cost, it doesn’t follow quantity or anything like this. It follows the pace or perhaps the momentum of price.” As such, bullish and bearish divergences within the Stochastic Oscillator may be used to foreshadow reversals.
%K = (Current Price – Lowest Price)/(Highest Price – Lowest Price) * 100
%D = 3-day SMA of %K
Lowest Price = Lowest price for the time period
Highest price = Highest price for the time period
%K is multiplied by 100 to move the decimal to two places
Different Variations: Fast, Slow-moving or complete
You will find 3 variations of the Stochastic Oscillator available. Rapid Stochastic Oscillator is founded on George Lane’s initial formulas for %K and %D. In the Fast type %K appear choppy.
Fast Stochastic Oscillator:
Fast %K = %K basic computation
Fast %D = 3-day SMA of %K
Slow Stochastic Oscillator:
Slow-moving %K = Fast %K smoothed with 3-day SMA
Slow-moving %D = 3-day SMA of Slow-moving %K
A bullish divergence takes place when lowest low is reached, however the Stochastic Oscillator records greater low. This reveals much lesser downside momentum which could foreshadow the bullish reversal. The bearish divergence takes place when cost makes higher high, nevertheless the Stochastic Oscillator records lowest high. This demonstrates much less upside momentum that may foreshadow a bearish reversal.