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Stochastic Indicator Overview

Stochastic Indicator : The Stochastic oscillator becomes reducible after adjusting the time period by the average of the result. The technical indicator is used for generating the overbought and oversold signal. Here the oscillator will vary with some price level and rely on an asset's price history. The stochastic oscillator consists of two lines reflecting the actual value. The divergence between the stochastic oscillator and trending price is an important reversal signal. It is predicated on the assumption of a closing price close to the current trend. The indicator will show information about momentum and trend strength. The indicator will analyze the price movement and tell speed and strong the price moves.

Stochastic oscillator Formula

The stochastic is measured with the K and D line. Here the D line will indicate the major signals in the chart.
K look like begin{aligned}&% K=100timesfrac{CP-L14}{H14-L14}\textbf{where:}\&CP=text{Most recent closing price}\&L14=text{Lowest price of the 14 previous trading sessions}\&H14=text{Highest price of the same 14 previous trading}\&qquadquadtext{ ,sessions}end{aligned}%K=100×H14−L14CP−L14Here, CP=Most recent closing priceL14=Lowest price of the 14 previous trading sessionsH14=Highest price of the same 14 previous trading sessions The formula for the D line is,
begin{aligned}&text{D} = 100bigg(frac{H3}{L3}bigg) \textbf{where:} \&H3 = text{Highest of the three previous trading sessions}\&L3 = text{Lowest price traded during the same three-day}\qquad text{ , period}end{aligned}D=100(L3H3).
where:-H3=Highest of the three previous trading sessionsL3=Lowest price traded during the same three-day period Kline is faster than the D line. They need to consider selling the stock indicator to move above the 80 levels. They will also need to consider buying an issue below the 20 lines and start to move up with increased volume.

Example

They will include charting tools that can be employed in practice. The standard time period used is 14 days by which we can be adjusted to meet the analytical needs. It is calculated by subtracting the low for the period from the current closing price, dividing by the total range for the period, and then multiplying by 100. If the 14-day high at $150, the low is $125 and the current close is $145, then the reading for the current session will be (145-125)/(150-125)*100 80. Then comparing the current price with a range over time the stochastic oscillator will reflect with price near its recent high/low. A reading of 80 would indicate the asset is on the verge of being overbought.

Summary

The stochastic indicator is the best technical analysis tool used to identify overbought and oversold instruments. They ate helpful in identifying potential trend reversals. They are used in conjunction with technical analysis tools such as moving average and trend lines.