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The Stochastics Oscillator uses closing prices in comparison with highs and lows of current trading ranges to indicate the trend of price movements. The premise behind the indicator is that the stock will close at the upper end of a given period's trading range when the price is trending upward and that the stock will close at the lower range during downtrends. Peaks of the oscillator are presumed to indicate overbought positions, while minimum values of the oscillator are presumed to indicate oversold positions.
The fast oscillator, k, consists of summing multiple days worth of comparisons between the daily closing price and multiple days of high and low prices. The slow oscillator, d, is typically the average of a 3 period sum of k. Required input fields for this chart are: (1) the period over which the high and low prices will be calculated for comparison with today's close; (2) The summing period for k; and (3) The averaging period for d.
There are multiple methods for using the Stochastics Oscillator as a trading signal. The following images illustrate three basic trading rules:
Divergences between the price and the Stochastic Oscillator are expected to be resolved when the price follows the Stochastic Oscillator.
Buy signals are issued when the %k rises above the %d, while sell signals are issued when the %k falls below the %d.
Buy signals are issued when the Stochastics Oscillator %k rises above the 20% line, while sell signals are issued when the Stochastics Oscillator falls below the 80% line.
