Novice Traders' Notebook  |  DEC 1997

The Stochastic Oscillator by Joe Luisi

The stochastic oscillator is one of the more popular indica-tors available on today’s software. This technical tool tells you where the current closing price is relative to the recent range of the market. Here are some techniques for using this classic indicator. First introduced by George Lane in the 1970s, the stochastic indicator has become one of the more popular technical indicators around. Pages upon pages have been devoted to explaining the indicator and how it works. Further, just about every technical analysis software product available today offers this indicator. The stochastic oscillator was designed to indicate when a market becomes overbought or oversold within a trading range. The indicator produces readings between zero and 100. As initially proposed, readings over 70 indicate an overbought market. The term overbought describes a situa-tion in which the market has run up quickly due to an influx of buyers. Eventually, the market reaches a price level high enough that traders feel uncomfortable buying. Then, as sellers enter the market to take profits, prices start to fall.

by Joe Luisi