What is Stochastic Oscillator?
The Stochastic Oscillator is a momentum indicator comparing a security's closing price to its price range over a set period, typically 14 days, producing values between 0 and 100.
Stochastic Oscillator Explained
The Stochastic Oscillator assumes that in an uptrend, prices close near their highs, and in a downtrend, prices close near their lows. Readings above 80 suggest overbought conditions, while readings below 20 suggest oversold conditions. Like RSI, divergences between the oscillator and price are often more reliable signals than the absolute levels.
Real-World Example
A stock has been declining and its Stochastic reading drops to 12, indicating oversold conditions. The oscillator then crosses above 20 while the stock forms a bullish candlestick pattern — a trader might use this as a buy signal with a tight stop.
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