Stochastic Oscillator

Stochastic Oscillator, developed by George Lane, is a momentum oscillator that measures price momentum by comparing closing price to the price range over a period. It's based on the observation that in uptrends, closing prices tend to be near period highs; in downtrends, closing prices tend to be near period lows.

Types

Stochastic performs best in ranging markets, effectively identifying short-term overbought/oversold conditions. In trending markets, avoid simple counter-trend trades in extreme zones; wait for stochastic to return from extremes before entering with trend. Many traders combine stochastic with trend indicators, seeking stochastic signals only in trend direction.