As originally introduced by George Lane, the classic stochastic
oscillator is not a normalized relative strength indicator,
like most other momentum oscillators. However, it
does use closing price in its calculation, but in a way slightly
different from other oscillators. Here’s a refresher for the
veteran traders and an introduction for the novices.
The stochastics oscillator was
originally introduced by George
C. Lane in STOCKS & COMMODITIES
in 1984. Since then,
it has become a popular indicator,
included in most technical
analysis software programs.
That, combined with the wide-spread
use of the personal computer,
has made stochastics an
easy indicator to use.
To gain a more complete understanding of the oscillator,
let’s look at the idea behind stochastics, then at how it is
calculated and interpreted. (To examine historical results
from backtesting the indicator on a number of securities, see
sidebar, “Historical testing in stochastics.”)