The Stochastic Oscillator
tries to show where a stock's price closed in relation to its price
range over 'n' time periods. Usually displayed as two lines, the
Stochastic Oscillator can be interpreted in several ways. The first
line is called "%K." while the second line ("%D") is simply a moving
average of %K. Traders tend to buy when either %K or %D falls below
20, and then subsequently rises above that level. They also tend
to sell when the Oscillator rises above 80 and then falls below
that level again, a 'penetration' if you like. Other traders like
to trade divergences between price and the Stochastic Oscillator.
Many day trading traders like to use the stochastics as a quick
and dirty support/resistance calculation, although the complexity
of the calculation makes a computer essential for this.
To calculate the Stochastic
Oscillator you need to decide on 4 values:- %K Periods, which are
the number of time periods used ('n'), %K Slowing Periods, which
controls the smoothing of %K (1 is a fast stochastic, 3 is a slow
stochastic), %D Periods, which is the number of time periods used
when calculating the moving average of %K and %D Method, which can
be Exponential, Simple, Time Series, Triangular, Variable, or Weighted.
Then, take today's low - lowest low in %K periods, divide by the
highest high in %K periods - lowest low in %K periods, multiplying
th eresult by 100.