Stochastic

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 1950s.[1] The term stochastic refers to the point of a current price in relation to its price range over a period of time.[2] This method attempts to predict price turning points by comparing the closing price of a security to its price range.

The 5-period stochastic oscillator in a daily timeframe is defined as follows:

where H5 and L5 are the highest and lowest prices in the last 5 days respectively, while %D is the N-day moving average of %K (the last N values of %K).

Usually, this is a simple moving average, but can be an exponential moving average for a less standardized weighting for more recent values. There is only one valid signal in working with %D alone — a divergence between %D and the analyzed security.