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Definition

A short term indicator developed by George Lane, identifying buy and sell signals in a particular security. The indicator compares the closing price to a range of trade over a certain period. Basic formula: (Close-Low)/(High-Low) The effect of this formula is that when the share closes at its low then the result is zero. When it closes above its low the result will be closer to 1. So you have an oscillator which moves quickly between 0 and 1 and which has been arranged mathematically so that it moves between 0 and 100. In addition, the formula calculates a 2/3 moving average (which you can designate as any type of moving average that you prefer). Sell signals are given when the stochastic itself drops through 80 and the 2/3 moving average is falling. Buy signals are given when the stochastic rises through 20 and the 2/3 moving average is rising. Consider the following example:
<figure class="container-fluid"><img class="img-responsive" style="display: block; margin: 0 auto; max-width: 100%;" src="/onlinecourse/img/glossary/stochastic-oscillator.jpg" alt="stochastic oscillator" />
<figcaption style="text-align: center;">Stochastic Oscillator</figcaption>
</figure>
There are two clear sells and two clear buys - and one occasion where the stochastic broke down through 80, but the 2/3 moving average was rising and so that is not a signal.

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