Stochastic Oscillator was developed by Dr. George C. Lane in the 1950s. It is a momentum oscillator that measures the closing price relative to the high and low prices over a certain period. The indicator is a banded oscillator, ranges from 0 to 100, which is useful for determining overbought and oversold levels. When the stochastic oscillator is above 80 percent, the market is overbought; when the stochastic is below 20 percent, the market is oversold. The 20 and 80 levels can still be adjusted based on the personal preferences and security characteristics.
Stochastic Oscillator is computed by taking the difference between the current closing price and the lowest low and divided by the difference between the highest high and lowest low for a number of trading periods. The result is then multiplied by 100. Lane recommended using the 14-day period.
The %D is plotted alongside %K to act as a trigger line.
A signal line occurs when %K (blue line) crosses %D (pink line).