![\"stochastic](\"https:\/\/www.alpharithms.com\/wp-content\/uploads\/1295\/stochastic-oscillator-parts-diagram-alpharithms.jpg\" "\\"stochastic-oscillator-parts-diagram-alpharithms\\"")
<\/a>To understand these moving parts, it’s important to realize that the Stochastic Oscillator provides calculations on a range of 0-100. Threshold lines are set (typically at 20 and 80) to indicate overbought or oversold status. Below are the main parts of the stochastic oscillator:<\/p>\n
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- %K (a.k.a Fast Stochastic)<\/strong> – A calculated number for the most recent value relative to the highest and lowest values over the lookback period.<\/li>\n
- Lookback Period<\/strong> – The number of previous periods for which the k value is calculated; typically 14 previous periods.<\/li>\n
- %D (a.k.a. Slow Stochastic)<\/strong> – A trailing momentum indicator relative to the k-values to smooth out trendlines and used to generate trade signals. Uses K values to generate a Simple Moving Average (SMA); commonly 3 periods in length.<\/li>\n
- Overbought Line<\/strong> – The threshold at which the SO indicates an overall bullish market trend. Typically set at 80 but also commonly set to 70.<\/li>\n
- Oversold line<\/strong> – The threshold at which the SO indicates an overall bearish market trend. Typically set at 20 but also commonly set to 30.<\/li>\n
- Min\/Max Lines<\/strong> – The top and bottom of the SO chart reflecting the 0-100 range of possible values for the SO.<\/li>\n<\/ul>\n
Fast vs. Slow Stochastics<\/h2>\n
The %k value represents the most recent value relative to the highest and lowest observed values during the lookback window. This number reflects a percentage total of the highest possible value during that range and is calculated as such:<\/p>\n
![\"stochastics](\"https:\/\/www.alpharithms.com\/wp-content\/uploads\/1295\/stochastics-oscillator-percent-k-formula-alpharithms-1024x576.jpg\" "\\"stochastics-oscillator-percent-k-formula-alpharithms\\"")
<\/a>The fast oscillator is calculated relative to the highest and lowest values during the lookback period. (Click to enlarge)<\/figcaption><\/figure>\n The %d value represents a smoothed out version of the %k, averaged out over a shorter lookback period\u2014commonly 3 periods in length. This signal is a simple moving average (SMA)<\/strong> of the %k and represents a slightly slower-to-react reflection of the relative price over the longer lookback period.<\/p>\n
![\"stochastics](\"https:\/\/www.alpharithms.com\/wp-content\/uploads\/1295\/stochastics-oscillator-percent-d-formula-alpharithms-1024x576.jpg\" "\\"stochastics-oscillator-percent-d-formula-alpharithms\\"")
<\/a>The formula for calculating the slow stochastic (%d) signal. (Click to enlarge)<\/figcaption><\/figure>\n The main difference in the slow stochastic signal is that it is calculated based on the %k signal rather than closing prices. In this sense, it is a less direct measure of price momentum and more an interpolated version of that momentum\u2014if we’re splitting hairs.<\/p>\n
Interpreting the Stochastic Oscillator<\/h2>\n
The stochastic oscillator, much like other price momentum oscillators such as RSI, provides insight to price momentum changes. In trading, the SO is based on the observation that prices tend to close near the daily high trading price during bullish markets and near the daily lows during bearish markets.\u00a0 More generally, the SO can be interpreted as a measure describing a price’s tendency to close near its previous high or low over a fixed period (lookback).<\/p>\n
The %k and %d values are called signal lines<\/strong> and indicate price momentum. When these lines cross it is considered an indicator of a shift in price momentum. The SO signals a possible upwards momentum shift if these signals cross when they are near the 20 (oversold) threshold. Likewise, the SO signals a possible downward trend if these signals cross when they are near the 80 (oversold) threshold line. Let’s take a look at some examples:<\/p>\n
![\"stochastic](\"https:\/\/www.alpharithms.com\/wp-content\/uploads\/1295\/stochastic-oscillators-diagram-alpharithms-1024x576.jpg\" "\\"stochastic-oscillators-diagram-with-labels-alpharithms\\"")
<\/a>A stochastic oscillator chart plotted below a pricing chart for $AAPL over a 3mo. period showing several crossover signals. (click to enlarge)<\/figcaption><\/figure>\n As we can see in the above diagram, the interplay of the signal lines of the Stochastic Oscillator is essential to its interpretation. The crossover points (circled in red) illustrate where the fast signal line crosses over the slow-moving line. This often signals a momentum shift in observed values.<\/p>\n
In trading, these signals are often used to time entries and exits. A word of warning; the stochastic oscillator can produce many false signals during volatile markets. Combining with other indicators, such as long-term moving averages<\/a>, can help offer greater support in signal accuracy.<\/p>\n
- Lookback Period<\/strong> – The number of previous periods for which the k value is calculated; typically 14 previous periods.<\/li>\n