The Stochastic Oscillator is a tool used by investors to see if the market is sold more or bought more. It examines the price movement’s speed and momentum, rather than the price. Dr. George Lane created the indicator in the 1950s, and it is used extensively in technical analysis. Above 80 would reflect that an asset is likely to be overbought, and below 20 would reflect that it is more than likely oversold.
How the Stochastic Oscillator Works
The stochastic indicator is an indicator which compares the price of the ending of a stock with its price range over a set number of periods. There are two lines to this indicator. The first line is referred to as the %K line and it simply refers to the current value of the oscillator.
Another line, called the %D line, is a three-day moving average of the %K line. So when you get the %K line falling above the %D line, you get a possible indication of it as an upward move. If the %K line happens to fall below the %D line, it would indicate a downward trend.
Benefits of the Stochastic Oscillator
- Determines Market Trends: Assists traders in knowing market situations and possible reversals.
- Functions Across Markets: Capable of use in stocks, forex, and commodities.
- Traders can customize the period length to lower false signals.
Conclusion
Stochastic Oscillator is a very effective tool for traders since it helps them to identify the trend and reversals of the market. It can, however, at times provide false signals, especially when it comes to a volatile market. Traders can increase the precision if they attempt to use it with other instructions as well. Through the application of this tool in an effective manner, traders can make better decisions and enhance their trading strategies.