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Stochastic Oscillator

Stochastic Oscillator is a technical indicator built upon comparison between the current closing price and price range for a certain period of time. The indicator consists of two lines: the main line %K as a solid one and the secondary %D as a dotted line. In order to get the point of Stochastic Oscillator, one should take into account the following details.

You should buy when both oscillator’s lines are down below 20 and then rise above this level. So you should place sell orders when the oscillator rises above 80 and then goes down below it.

If the %K line gets higher than %D, go long. If %K is lower than %D, go short.

You should also monitor discrepancies when prices make a series of fresh highs, but Stochastic Oscillator fails to rise above its previous highs.

Calculation

The Stochastic Oscillator has four variables:
- %K periods. This is the number of time periods used in the stochastic calculation;
- %K Slowing Periods. This value controls the internal smoothing of %K. A value of 1 is considered a fast stochastic; a value of 3 is considered a slow stochastic;
- %D periods. This is the number of time periods used when calculating a moving average of %K;
- %D method. The method (i.e., Exponential, Simple, Smoothed, or Weighted) that is used to calculate %D.

The formula for %K is:
%K = (CLOSE-LOW(%K))/(HIGH(%K)-LOW(%K))*100
where
CLOSE - is today`s closing price;
LOW(%K) - is the lowest low in %K periods;
HIGH(%K) - is the highest high in %K periods.
The %D moving average is calculated according to the formula:
%D = SMA(%K, N)
where
N - is the smoothing period;
SMA - is the Simple Moving Average.

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