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Stochastics

A stochastic is an oscillator, which is used to determine whether a market is overbought or oversold. As with many of the Technical Analysis indicators, it is best used not in isolation but in conjunction with other indicators and chart patterns, which may outline whether a market is moving up or down, with or against the underlying trend (see Joe DiNapoli’s book, Trading with DiNapoli Levels (1998) www.fibtrader.com).

The Stochastic Oscillator measures the relationship of a security’s closing prices (on given price bars) with its highs and lows. It consists of two lines, %K and %D, and ranges between 0% and 100%. A reading of 0% shows that the security’s close was the lowest price that it has traded during the preceding x-time periods. A reading of 100% shows that the security’s close was the highest price that the security has traded during the preceding x-time periods.


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