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.