Stochastic Oscillator
A technical indicator developed by George Lane that compares a security's closing price with its price range for a given time period. The premise behind the Stochastic Oscillator is that when a stock is rising, it tends to close near the high of the time period and a falling stock closes near its low.

The Stochastic Oscillator is displayed as two lines. The main line is called %K and is calculated using the high, low, and closing data. The second line, called %D, is a moving average of %K. On Investor charts, %K is displayed as a solid, black line and %D is displayed as a red line.

The Stochastic Oscillator is plotted on a chart with values ranging from 0 to 100 for a specified time frame. As with moving averages, the sensitivity increases with shorter time spans. Readings above 80 are strong and indicate that the price is closing near its high. Readings below 20 are strong and indicate that the price is closing near its low. Mr. Lane believes the most important buy and sell signals occur when the %D line and the stock price diverge. For example, a strong buy signal occurs when a stock makes a new high and the %D clearly fails to reach or better its old high. Conversely, a stock is oversold and ready to reverse when it makes a new low but the %D fails to confirm that low.

It is possible to modify the Stochastic Oscillator calculation to invoke a slow stochastic thereby smoothing out some of the volatility in the indicator. Many technicians believe that the slow stochastic provides more accurate signals and is easier to interpret.

Stochastics can be calculated for any time period. Choosing the right time period for the stochastics is similar to choosing the right number of days for a moving average. In effect, stochastics is a trend-following method since its lines will cross after tops and bottoms have been made. Choosing too short a time period will make the stochastics so sensitive that it becomes virtually worthless. If the time period is too long, it is too slow to turn and too insensitive to be useful.

When using Investor charts to study stochastics, you can select whatever time period works best for your investing strategy. You can also choose to view the fast stochastic or the slow stochastic. Check this feature out in Investor's Stock area under the Charts tab on the left navigation bar.