My Membership
 Lost Password
 Update Registration
 View or Upgrade My
 Subscription
 View Current and
 Past Billing Information
 Update Credit Card
 Cancel Service
 Web Site Help
 Contact Us
 System Requirements
 Privacy Policy
 Terms of Service
 

Technical Studies: Full Stochastic Oscillator

The Full Stochastic Oscillator compares the most recent closing price for a security against its relative price range over a specified period. Crossovers of the two lines in the study often generate signals indicating a reversal of the current price trend for that security.

A reading of 100 indicates that the security closed at its trading high during a given period; a reading of zero indicates that the security closed at its given low during the period. A reading of 80 or higher may indicate an overbought condition (price decline may be due), while a reading of 20 or lower may indicate an oversold condition (price rise may be due).

Some technical analysts buy when the "fast" line on the Stochastic Oscillator, the %K, moves up past 20. Similarly, they sell when the %K peaks and turns below 80. In general, buy and sell signals are also formed when %K falls below (sell) or rises above (buy) the %D. The %D is usually a short-term (e.g., three-period) Simple Moving Average of the %K, so crossover signals are common and may not be consistently reliable.

Buy and sell signals also arise when the %K and the security's price experience a divergence and the %K is in oversold/overbought territory. A bullish divergence situation occurs when a security's price reaches lower lows while the %K forms a higher low. The buy signal may appear when the %K crosses above the 20 level. A bearish divergence situation occurs when a security's price reaches higher highs while the %K forms a lower high. The sell signal may appear when the %K crosses below the 80 level.

Here's how the three default parameters for the Stochastic Oscillator (14, 1, 3) work:

  • The first parameter, 14, indicates that number of periods (minutes/hours/days/weeks/months) to include in the calculation of the %K (fast) line.
  • The third default parameter, 3, indicates the number of periods to include in the calculation of the %D (slow) line. By default, the %D (slow) line is a 3-period SMA of the %K (fast) line, meaning that it is plotted based on the average closing value of the %K (fast) line over the last three periods.
  • The middle parameter, 1, indicates what smoothing factor, if any, to apply when plotting the %K (fast) line. By default, a 1-period SMA of the %K (fast) line is plotted, meaning that no smoothing factor is applied to the %K (fast) line. Changing the middle parameter to 3, for instance, applies a 3-period SMA to the %K (fast) line, meaning that the %K (fast) line is plotted based on its average closing value over the last three periods.

All three parameters can be customized. The 14, 1, 3 default parameters plot what technical analysts commonly refer to a as a Fast Stochastic, which generates frequent buy/sell signals. Changing the middle parameter to 2 or higher smoothens the %K (fast) line, creating %K and %D lines that are less responsive to sudden price fluctuations.

Calculating the Full Stochastic Oscillator: The Stochastic Oscillator consists of two lines, the %K and the %D.
%K = (Recent close - Lowest low during period)
divided by (Highest high during period - Lowest low during period)
× 100
%D = the 3-period Simple Moving Average of the %K

 
 Get Help With...
 GOLD Tracker
 Stocks
 My Portfolio
 Funds
 Alerts