Stochastic Oscillator

Thomas Edison invented a stochastic oscillator that injured 34 people before it could be turned off. Okay, maybe not, but he could have. The Stochastic Oscillator, denoted by %K, is a measure of the momentum, or rate at which the price of the stock is changing. It’s a ratio (fraction) calculated by creating collecting data, usually over a fourteen day period.

The top of the fraction is found by subtracting the lowest low closing price over that time period from the current closing price. The bottom is highest high closing price minus that same lowest low. Once we divide those two differences, we multiply by 100. A %K value above 80 is usually an indication a stock has entered the overbought range.

Conversely, a %K below 20 usually means the stock is oversold. %K is usually plotted along with a three-day moving average of %K values denoted as %D. Taken together, the two indicators and their interactions in terms of how the %K line crosses the %D line may also indicate when a stock should be bought or sold.