STOCHASTIC OSCILLATOR (STO)
Stochastic Oscillator (STO) is momentum
indicator & it oscillates between 0 & 100. It’s developed by George
C. Lane in late 1950. Using this you can find a stock under
accumulation or distribution.
Description :
Stochastic Oscillator (STO) gives momentum
of stock. It’s work good with 14-days time period. You can very time
period & find out which time period works better for you.
Stochastic Oscillator (STO) have two
component %K & %D. Now a day people using blue & red line to
display.
You can get most reliable signals looking
divergence. With positive divergence & %K cross above %D you can
buy a stock & with negative divergence & %K cross below %D you can
sell stock.
How to Calculate?
Here we calculate FAST STO (14, 3)
%K = [ KK / DD ] * 100
Where KK = ( Today’s Close) – (Lowest Low in %K periods )
DD= ( Highest High in %K Periods ) – (Lowest Low in %K periods )
For 14 days %K first find out Highest High (
Say 20 ) & lowest Low ( Say 14 ) for last 14 days. If today’s close
price was 18 then
%K = [ (18-14) / (20 – 14 ) ]*100 = 66.67
Now calculate a moving average of %K with
time period specified for %D. This moving average called %D
%D = 3 –days moving average of %K
Now we calculate FULL STO ( 14, 3, 3 )
%K = 3 –days moving average of %K of FAST STO
%D = 3 –days moving average of %K of FULL STO
Divergence in the Stochastic Oscillator (STO): A lower peak in the Stochastic Oscillator (STO) against higher highs in the stock market
called negative divergence and typically it's a
Sell signal.
A higher peak in the Stochastic Oscillator (STO) against lower lows in the stock market
called positive divergence and typically it's a
Buy signal.
To get good result with Stochastic Oscillator (STO) we need to use it with
other technical indicators like
Moving Average (MA)
|
On Balance Volume (OBV)
|
Percentage Price Oscillators (PPO)
|
Price Rate Of Change (ROC)
|
Relative Strength Index (RSI)
|
Commodity Channel Index (CCI)
|
Chaikin Money Flow oscillator (CMF).
When we use two or three technical indicators and in case of positive divergence and negative divergence it giving real good result, only you need to change time span and find out which is a better pair for you.