George Lane was the originator of the stochastic oscillator in the 1970's. He has observed that as prices increase in an up trend, the closing prices tend to be closer to the upper end of bars and in a down trend the closing prices tend to be nearer the lower end of bars. He therefore developed the stochastics to distinguish the relationship between the closing price and the high and low of a bar.
A stochastic is basically an oscillator that will help us measure the overbought and oversold condition of a currency/shares in the market. The Stochastic is another oscillator that indicate to us the end of a trend. These two lines are similar to the MACD, oen line is faster than the other line. The stochastic consists of two lines, namely the %K and %D. These two line will move between a vertical range of 0 to 100. Readings of the stochastic above 80 indicates overbought while readings below 20 indicates oversold.
The stochastic can also be used as a BUY/SELL indicator. When the faster %K line crosses above the slower %D line and the lines are below 20, a "BUY" signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a "SELL" signal is generated.
There are alot of different ways to use stochastics, but the main use of the stochastic is to deterermine if the market is overbought or oversold.
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