Updated on March 19, 2023
A stochastic oscillator is an indicator in technical analysis and is used to identify the potential condition of a security based on its overbought or oversold positions. The basic premise of the indicator is that the price of the security will tend to close near its high in an uptrend and near its low in a downtrend.
What are the two lines in Stochastic Oscillator?
The two lines in the stochastic oscillator are the %K line and the %D line. The %K line represents the fast line that measures the current price in relation to the high and low range of a security over a defined number of periods. The %D line is a slower line which represents the moving average of the %K line.
How to interpret the stochastic oscillator?
The stochastic oscillator is used to identify the potential overbought and oversold conditions of security. An indicator above 80 is considered overbought and an indicator below 20 is considered oversold. In addition, traders can also interpret the potential trend reversals through bullish and bearish divergences between the Stochastic Oscillator and the security’s price.