In technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels. George Lane developed this indicator in the late s. Usually this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values.

The idea behind this indicator is that prices tend to close near the extremes of the recent range before turning points. The Stochastic oscillator is calculated:.

Smoothing the indicator over 3 periods is standard. George Lane , a financial analyst, is one of the first to publish on the use of stochastic oscillators to forecast prices.

According to Lane, the Stochastics indicator is to be used with cycles , Elliot Wave Theory and Fibonacci retracement for timing. In low margin, calendar futures spreads , one might use Wilders parabolic as a trailing stop after a stochastics entry.

Stochastics predicts tops and bottoms. The signal to act is when there is a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom. Stochastics attempts to predict turning points by comparing the closing price of a security to its price range.

Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.

Divergence-convergence is an indication that the momentum in the market is waning and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics, relative to price, forecasts a reversal in the price's direction. An event known as "stochastic pop" occurs when prices break out and keep going.

Aroon

This is interpreted as a signal to increase the current position, or liquidate if the direction is against the current position. From Wikipedia, the free encyclopedia. The 5-period stochastic oscillator in a daily timeframe is defined as follows: Retrieved 6 October A Complete Guide to Technical Trading Tactics: Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. New York Institute of Finance.

The Complete Day Trader. Breakout Dead cat bounce Dow theory Elliott Wave Principle Market trend.

Momentum (technical analysis) - Wikipedia

Candlestick chart Kagi chart Line chart OHLC chart Point and figure chart. Broadening top Cup and handle Double top and double bottom Flag and pennant Gap Head and shoulders Island reversal Price channels Triangle Triple top and triple bottom Wedge pattern. Doji Hammer Hanging man Inverted hammer Marubozu Shooting star Spinning top.

Hikkake pattern Morning star Three Black Crows Three white soldiers. Bottom Fibonacci retracement Pivot point PP Top. Average directional index A. Advance—decline line ADL Arms index TRIN McClellan oscillator.

Introduction to Technical Indicators and Oscillators [ChartSchool]

Coppock curve Ulcer index. Retrieved from " https: Navigation menu Personal tools Not logged in Talk Contributions Create account Log in. Views Read Edit View history. Navigation Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store.

Interaction Help About Wikipedia Community portal Recent changes Contact page. Tools What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page. This page was last edited on 28 September , at Text is available under the Creative Commons Attribution-ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy.

Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view. Chart Broadening top Cup and handle Double top and double bottom Flag and pennant Gap Head and shoulders Island reversal Price channels Triangle Triple top and triple bottom Wedge pattern. Simple Doji Hammer Hanging man Inverted hammer Marubozu Shooting star Spinning top.