What is stochastic oscillator?

The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. BREAKING DOWN 'Stochastic Oscillator'.

What is an oscillator and how does it work?

The oscillator compares the position of a security’s closing price relative to the high and low (max and min) of its price range during a specified period of time. In addition to gauging the strength of price movement, the oscillator can also be used to predict market reversal turning points.

Which oscillator indicators show overbought and oversold regions?

Another oscillator indicator that shows overbought and oversold regions is the Relative Strength Index (RSI). However, the RSI is very different to the stochastic indicator which is why traders need to understand the formula and what the indicator communicates about price.

How does the stochastic oscillator foreshadow reversals?

Lane also reveals in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences.