Low readings indicate that price is near its low for the given time period. High readings indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges with the closing price at the end of the period line.
In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend. George Lane identified another form of divergence to predict bottoms or tops, dubbed “set-ups.” A bull set-up is basically the inverse of a bullish divergence. The underlying security forms a lower high, but the Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high, the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next decline is then expected to result in a tradable bottom. However, the momentum indicator is prone to generating false signals.
A reading of 100 indicates the highest point during the designated time period. The stochastic indicator helps traders identify trade exit and entry points by applying the overbought/oversold strategy. Traditionally, readings above 80 indicate that the instrument is in the overbought range, and readings under 20 suggest oversold conditions. Oversold and overbought levels can be used to forecast trend reversals.
The stochastic oscillator displays the position of a stock’s closing price in respect to its high and low range over 14 days. According to Lane, the stochastic stochastic oscillator definition oscillator does not change in relation to price, volume, or other factors, rather Lane claims that the oscillator tracks the price’s pace or momentum.
What is a fast Stochastic oscillator? And what is a slow Stochastic oscillator?
Technical analysis focuses on market action — specifically, volume and price. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. A bullish divergence forms when price make a lower low, but the Stochastic Oscillator forms a higher low. This indicates less downward momentum that could foreshadow a bullish reversal. A bearish divergence forms when price makes a higher high, but the Stochastic Oscillator forms a lower high. This shows less upward momentum that could foreshadow a bearish reversal.
What is the meaning of stochastic oscillator?
A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.
Before looking at some chart examples, it is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend.