Fast Stochastic Oscillator

The Fast Stochastic Oscillator, or %K, shows how a security's current close compares to its range of high and low prices over a set period of time. The most common time period used is 14 days, though any amount of time can be applied to this indicator.

Fast Stochastic Oscillators use information about a security's recent closing prices, the highest high and the lowest low over the time period used. A three-day Moving Average, called %D, is typically plotted alongside %K, helping to smooth out data and act as a signal line. When %K crosses above %D, it is considered to be a bullish signal by some analysts, while a cross below %D can be considered a bearish signal.

A type of banded oscillator, the Stochastic Oscillator will always fluctuate between extreme levels ranging from 0 to 100. Some analysts believe that results near the high end of the range indicate accumulation, or buying pressure, and results near the low end of the range indicate distribution, or selling pressure. Using this theory, results above 80 are thought to indicate overbought levels for the security; results below 20 are thought to indicate oversold levels. If a security is overbought, prices may begin to decline. If a security is oversold, prices may begin to rise.

Calculations

The formula for %K is:

Where %D is a smoothed version of the %K line. Usually, three is the time period used. The %K formulas is as follows:

%D = 100 X (H3/L3)

Where:

H3 = the 3 period sum of (C - L5)
L3 = the 3 period sum of (H5 - L5)

 

Sample Chart

 

The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.