Stochastic Oscillator: What It Is, How It Works, How To Calculate

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

Lane also revealed in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences. Rather than using readings above 80 as the demarcation line, they instead only interpret readings above 85 as indicating overbought conditions. On the bearish side, only readings of 15 and below are interpreted as signaling oversold conditions.

How Do You Make Stochastic Charts With Excel?

A buy signal is generated when the oscillator first breaks below 20 and then moves back above 20. Although they have different calculations, both tools are popular, reputable technical analysis indicators with similar objectives. A stochastic reading is a percentage expression of a security’s trading range within a given period. Today’s https://www.bigshotrading.info/ charting software does all the calculations, making the whole technical analysis process so much easier, and thus, more exciting for the average investor. For example, when the oscillator indicates bearish divergence, the price may still continue climbing higher for several trading sessions before turning to the downside.

These helpful tips will remedy that fear and help unlock more potential. It’s easy to get started when you open an investment account with SoFi Invest. SoFi doesn’t charge commissions, but other fees stochastic oscillator definition apply (full fee disclosure here). Despite its benefits, the stochastic oscillator is not a perfect tool. There are several benefits to using the stochastic oscillator when evaluating investments.

Identifying overbought/oversold indicators

The general idea for this oscillator is that in an uptrending market prices will close near the indicator’s high, and in a downtrending market prices will close near the low. Trade signals are generated when the “fast” %K line crosses above or below the three-period moving average, or “slow” %D. The price and the stochastic oscillator indicator formed a regular bearish divergence (1).