A technical indicator developed by George Lane that compares a
security's closing price with its price range for a given time
period. The premise behind the Stochastic Oscillator is that when
a stock is rising, it tends to close near the high of the time
period and a falling stock closes near its low.
The Stochastic Oscillator is displayed as two lines. The main
line is called %K and is calculated using the high, low, and
closing data. The second line, called %D, is a moving average of
%K. On Investor charts, %K is displayed as a solid, black line and
%D is displayed as a red line.
The Stochastic Oscillator is plotted on a chart with values
ranging from 0 to 100 for a specified time frame. As with moving
averages, the sensitivity increases with shorter time spans.
Readings above 80 are strong and indicate that the price is
closing near its high. Readings below 20 are strong and indicate
that the price is closing near its low. Mr. Lane believes the most
important buy and sell signals occur when the %D line and the
stock price diverge. For example, a strong buy signal occurs when
a stock makes a new high and the %D clearly fails to reach or
better its old high. Conversely, a stock is oversold and ready to
reverse when it makes a new low but the %D fails to confirm that
It is possible to modify the Stochastic Oscillator calculation
to invoke a slow stochastic thereby smoothing out some of the
volatility in the indicator. Many technicians believe that the
slow stochastic provides more accurate signals and is easier to
When using Investor charts to study stochastics, you can select
whatever time period works best for your investing strategy. You
can also choose to view the fast stochastic or the slow
stochastic. Check this feature out in Investor's Stock area under
the Charts tab on the left navigation bar.