V.8:1 (29-30): SIDEBAR: Stochastic oscillator by Mike Takano

Stochastic oscillator by Mike Takano

The stochastic oscillator is used to indicate overbought or oversold conditions on a scale of zero to 100%.

The stochastic process is based on the observation that as price decreases, the daily closes tend to accumulate nearer the extreme lows of the daily range Likewise, as price increases, the daily closes tend to accumulate closer to the extreme highs of the daily range. This concept also holds for monthly, weekly or even intraday time frames.

Stochastics produces two oscillating lines—%K and %D. The %K line, also referred to as the stochastic "raw value," is based on the lowest low and highest high occurring during a selected time period, n, which is usually 5:

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