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# Stochastic oscillator (STOCH)

The **Stochastic Oscillator** is an indicator of speed of changing or the Impulse of Price.

%E = 100 * (N - LLV(n)) / (HHV(n) - LLV(n)),

%D = MA(%K, s),

where N - is the price of closing of the current period,

LLV(n) - the lowest price within the last n periods,

HHV(n) - the highest price within the last n periods,

n - amount of periods (usually from 5 to 21),

s - amount of periods of calculation of the moving average.

It demonstrates the moments, when the price reaches the border of its trade diapason within predefined time period. It comprises 2 curve lines - the slow (%D) and the fast (%K). The **Stochastic Oscillator** also comprises 4 variables.
They are the following:

- The number of time periods used in the stochastic calculation are called %K Periods.
- The number of time periods used when calculating the moving average of %K are called %D Periods.
- The interior smoothing of %K is being controlled by the value. A value of 3 is considered a slow stochastic. In addition, a value of 1 is considered a fast stochastic.
- %D Method helps to measure %D. It can consist of different kinds: Simple, Exponential, Time Series, Weighted, or Variable Triangular.

One method when trading using the Stochastic Oscillator is to sell when the either line rises above 80 and then falls back below. Vice versa, purchase when either %K or %D decreases below 20 and then again reaches that level. Another way of action is to watch timing trades and to sell when the %K line shifts below the %D line and purchase when the %K line shifts over the %D line.

Besides, you should always follow the discrepancies. For instance, if prices start reaching new peaks and the Stochastic Oscillator fails to surpass its previous peaks, the indicator usually demonstrate in which direction prices are moving.

An interval from 0 up to 100 comprises all the indicator's possible values. While building an indicator the two control levels are set on the chart where the top level is set at 80 and the low level is set on the 20. If STOCH lines cross it, then it demonstrates the oversell or overbuy situation in the market. The indicator demonstrates oversaturation with sell trades in the market, so the zone of purchases is started if STOCH lines shift below bottom control level. In addition, the indicator demonstrates oversaturation with purchase trades in the market, so the zone of sales is started if the STOCH lines shifts over the top control level.

As a rule, they use the following interpretation of the indicator:

- If the curve %K crosses the curve %D from below upward, you should purchase.
- If the curve %K crosses a curve %D from top to downward, you should sell.
- If the oscillator %K or %D shifts below the line, and crosses again at the bottom level upwards, you should purchase.
- If the oscillator moves above the line, and then crosses the top level downwards, you should sell.

The presence of discrepancy is when, for instance, the prices have reached new highs, and the values of oscillator turned out to be too weak for reaching new peak values.