Technical indicator

Fast Stochastic Oscillator

The Fast Stochastic Oscillator is a momentum indicator that shows where the closing price lies within the high–low range of the last n periods. Its values range from 0 to 100.

Type

Momentum oscillator (0–100)

Typical parameters

%K n₁ = 5 or 14, %D n₂ = 3 or 5

Main signal

%K crosses %D, or leaves the 20/80 zones

What the stochastic shows

Developed by George Lane in the 1950s, the stochastic oscillator is based on the observation that in an uptrend prices tend to close near the top of their recent range, and in a downtrend near the bottom. A 5-period reading of 30 means the current close is 30% of the way up from the lowest low of the last 5 days, and 70% below the highest high. Readings below 20 are considered oversold, above 80 overbought.

Calculation

where C_t is today’s close, L_n1 and H_n1 are the lowest low and highest high of the last n₁ periods, and SMA is a simple moving average over n₂ periods.

Trading signals

• Level signals: buy when %K or %D falls below 20 and then rises back above it; sell when %K or %D rises above 80 and then falls back below it.
• Crossover signals: buy when %K crosses above %D; sell when %K crosses below %D.

The fast version reacts quickly and produces many signals. The Slow Stochastic Oscillator smooths it, and Williams %R is the same measurement on an inverted scale.