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A technical momentum indicator that compares a closing price to its price range over a given time period. Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price.” As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals.
Stochastic indicator is calculated:
%K = 100[(C - L14)/(H14 - L14)]
C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period.
%D = 3-period moving average of %K
Stochastic Oscillator makes it easy to identify overbought and oversold levels. Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold. These levels can be adjusted to suit analytical needs and security characteristics. Readings above 80 would indicate that the price was trading near the top(see also CCI). Readings below 20 occur when market is trading at the low end of its high-low range.