‘Stochastic’ is a Greek word that means ‘point of aim’ or ‘target.’ It was used by 18th century Swiss mathematician Bernoulli regarding mathematical laws of probability.
Today, the Stochastic indicator that one can use on OSK188 is based on the work of George Lane in the early 1950s. Lane who was dissatisfied with the oscillators used to measure the momentum of the direction of a price of a security developed the indicator.
With a range between 0 and 100, the Stochastic oscillator gives visual indications of overbought and oversold conditions. Generally, when the indicator rises above 80 it signals an overbought condition while below 20 is considered oversold.
In Stochastic, there are Stochastic Fast and Stochastic Slow.
Both Stochastic Fast and Stochastic Slow have two lines, %K and %D. Stochastic Slow is derived from Stochastic Fast.
Let’s explore further:
Fast %K measures the momentum behind the oscillator with the following formula:
Fast %K= [(Current Close – Lowest Low) / (Highest High – Lowest Low)] X 100
Fast %D is a simple moving average of Fast %K
Stochastic Slow is derived from Stochastic Fast. It is similar in calculation and interpretation to Stochastic Fast:
Slow %K: Equal to Fast %D
Slow %D: A moving average of Slow %K
The shape of the Stochastic top or bottom helps to indicate market trend as well. A narrow bottom that is not very deep foretells a strong rally forthcoming. A broad deep bottom indicates bearish sentiments with a weak rally ahead. Similarly, a narrow top tells of a correction that’s upcoming.
Buy and Sell signals
Buy: When the Stochastic is below the 20% oversold level and the %K line crosses over the %D line, buy.
Sell: When the Stochastic is above the 80% overbought level and the %K line crosses below the %D line, sell.
Let’s take a look at the difference between the Stochastic Fast and the Stochastic Slow.
Comparing the Stochastic Slow to Stochastic Fast, it is clear why most traders prefer the former. It is a much smoother indicator that eliminates unnecessary ‘noise’.
A simple and straightforward indicator, it is no wonder the Stochastic oscillator is popular with traders.
As with all other technical indicators, it is highly recommended to use the Stochastic oscillator together with other indicators to make better informed trade decisions. Relying on one single indicator to make a decision may not turn out to be so accurate.