Info 1: stochastic oscillator definition
Info 2: How stochastic oscillator works
Info 3: stochastic oscillator vs Bollinger band
Info 4: example of Stochastic oscillator
Opening information:
Stochastic oscillator breaks into two words Stochastic and oscillator. Stochastic means patterns of random probability and oscillator means a device that shows a signal.
Stochastic oscillator means single which are provided based on the random probabilities.
So now let’s have a look at what is a Stochastic oscillator, how the stochastic oscillator works in public securities, and what is the difference between stochastic oscillating and the Bollinger band, finally one brief example of the Stochastic oscillator.
Info 1: Stochastic oscillator definition
Stochastic oscillator don’t represent any of the specific things or objects, instead, they are technical tools that are used to track certain security in over-bought or over-sold positions.
However, this over-bought and over-sold position helps the Investors to enter the order on the market to trade the stocks or any kind of Securities using provided signals.
This Stochastic oscillator occupied the two lines of bands, not on the market securities but as a separate indicator to show the signal for the trader.
Supposedly if the Indicator tool does not have the purpose of showing and calculating the stock grown of over-bought or over-sold state using these two lines this indicator wouldn’t be considered a Stochastic oscillator.
So let’s dive into know, how these two lines of bands are calculated using the two functioned calculations to predict the public securities market.
Info 2: Stochastic oscillator works
Stochastic oscillator two lines contain two kinds of functions, the first line tracks the amount of how many points of amount are high or lower by subtracting the recent closed trading price from the last 14 days’ trading low price.
Another second line tracked the amount how much money that would be high or low after subtracting the 14-day trading period of high price from the 14-day trading period of low price.
Moreover, by dividing the First line value and second line value answer, the indicator arrived at the value of decimal place. Using the decimal it’s covert into a final percentage.
That percentage shows that certain securities would be over-bought or over-sold or normally trading sideways like a relative strength index.
If the final value arrives above 80 percent it’s categorized as over-bought stock over the following 14 days or if the final value percent is not above 20 percent, it’s separated into the category of over-sold security.
Here these 14 days are not fixed in any
Stochastic oscillator tools, indeed 14 days default standard, this day could be changeable based on the Investor’s needs but with the same method of calculation.
Most people confuse the Stochastic oscillator and relative strength index, let’s jump into the key difference in it anyway.
Info 3: stochastic oscillator vs Bollinger band
The difference between the stochastic oscillator and the Bollinger band is that in the stochastic oscillator, the momentum indicator is used. It is used by investors on the trading chart as an excellent indicator to compare the close values of securities or stocks to the value obtained within a specified period.
Bollinger band is a technical tool used on the trading chart using a simple moving average and two standard deviations. the two standard deviations indicate upper band and lower band.
To make you more clear about the stochastic oscillator, let’s see one clear example below.
Info 4: example of Stochastic oscillator
Say you are a stock Investor who invests in stock B, where stock B’s recent closed price was 12 dollars, And the lowest trading price of the last 14 days trading period is 8 dollars.
By subtracting the 12 dollars from 8 dollars it shows 4 dollars was grown amount over the last 14 days when compared to the recent closed price.
And the other hand, in 14 days highest high traded price was 19 dollars and the lowest low was 8 dollars over the 2 weeks, therefore subtracting 19 dollars with 8 dollars shows that 11 dollars is the maximum growth amount over this determined time.
By substituting with dividing the recently closed growth amount of 4 dollars and 11 dollars maximum grown over the past 14 days, it shows what the current position of stock B has grown from the lowest price of 14 days.
Clearly, after dividing the 4 dollars by 11 dollars it leads to the answer of 0.3636 if we convert this 0.3636 into a percentage. it shows 36.36 percent had grown as per the analysis of the Stochastic oscillator tools. Here the 36 percent is shown separately and how much amount of stock is bought and sold over the past 14 period.
Note:
The 14-day period takes place here, it’s a default period if you want you could allowed to use any kind of indicator based on your use such as 24, 30, and 7 days.