Stochastics Stochastics A stochastic is an oscillator that measures the relative position of the closing price within the daily range. It is based on the commonly accepted observation that closing prices tend to cluster near the day's high prices as an upwards move gains strength and near the lows during a decline. When the market is about to turn from up to down, for instance, it is often the case that the high's are higher, but the closing price settles nearer the lows. This makes the stochastic oscillator different from most oscillators which are normalized representations of the relative strength, the difference between the closing price and the selected trend speed. The three indicators that result from the stochastic measurement are called %K, %D and %R. The latter one, %R, was improved by Larry Williams and is discussed in a following section. The first two calculations form the normal concept of the stochastic oscillator and are calculated for today t as where C, is today's closing price L,(5) is the low price of the last 5 days R,(5) is the range of the last 5 days (highest high minus lowest low) as of today5 Using the stochatic oscillator The stochatic oscillator measures the difference between the high price, the low price and the closing price over a given period of time. Two lines the %k and the %D are represented on a scale from 0% - 100%. When the two lines cross below 10% and are heading higher, in combination with a break through the current resistance trend line this can be a signal for a trend reversal. Similarly, when the two lines (%K and %D) have crossed over above 90% and heading downwards, and a break of the current support trend line has occurred, this can be a signal for a trend reversal.  Back to the Learning Center Home Page »