Definitions for "Stochastics"
An oscillator based on the position of the current close relative to the absolute price range over the last days. Stochastics consists of two lines: %K, which is the basic calculation, and %D, which is a moving average (typically three days) of the %K line. Usually, "stochastics" refers to an additionally smoothed version of the formula, whereby the original %D becomes the new %K line and a moving average of this line becomes the new %D line (this version is sometimes called "slow" stochastics, while the original calculation is called "fast" stochastics).
A technical indicator that functions as an overbought/oversold oscillator. It consists of 2 lines (%K & %D). Based on the premise that when price is rising, it will tend to close near the high of the day on daily charts (but can be used on charts of any time period from 1-minute & up). For an advance to stop, it must first slow down. Thus a change in the momentum of an advance occurs before price reverses. Stochastics attempts to identify this change in momentum. Also used to signal divergences. Works best in non-trending markets.
These oscillators measure overbought/oversold situations, divergence and trading signals. They are based on the following observations: in an uptrend, the closing price is usually closer to the high of the price range, whereas, in a downtrend the closing price is usually near to the low of the price range. The Stochastic uses two lines. The formulae used to determine both lines are given using a popular parameter set of 5 and 3 days. %K = 100 x (C-L5) / (H5-L5). where C= last close or latest price. L5 = lowest low during the last 5 events. H5 = highest high during the last 5 events. %D = 100 x H3/L3. %D is a three-day or event moving average of %K. where H3 = 3 day sum of (C-L5) and l3 = 3 day sum of (H5-L5). The same 75 and 25 values are used to identify overbought/oversold situations. A slower stochastic is sometimes preferred to counteract whipsawing and act as a filter. In this case the %K line is not shown. %D is displayed with a new line: %Dn = 3 day moving average of %D. The parameters to be input in this case would then be 5-3-3.
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