page_title: Stochastic oscillator
section_title: Interpretation
hierarchical_section_title: Stochastic oscillator / Interpretation
caption_attribution_description: English: Stochastic used to forecast divergence.
context_page_description: In technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane developed this indicator in the late 1950s. The term stochastic refers to the point of a current price in relation to its price range over a period of time. This method attempts to predict price turning points by comparing the closing price of a security to its price range.
  The 5-period stochastic oscillator in a daily timeframe is defined as follows:
  where H5 and L5 are the highest and lowest prices in the last 5 days respectively, while %D is the 3-day moving average of %K. Usually this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values.
  There is only one valid signal in working with %D alone — a divergence between %D and the analyzed security.
context_section_description: The signal to act is when there is a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom. As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.
  Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.
  An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.
  Divergence-convergence is an indication that the momentum in the market is waning and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics, relative to price, forecasts a reversal in the price's direction.
  An event known as "stochastic pop" occurs when prices break out and keep going. This is interpreted as a signal to increase the current position, or liquidate if the direction is against the current position.
caption: Stochastic divergence.
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