The Stochastic oscillator is another technical indicator that helps traders determine where a trend might be ending.
The oscillator works on the following theory:
- During an uptrend, prices will remain equal to or above the previous closing price.
- During a downtrend, prices will likely remain equal to or below the previous closing price.
George Lane created this simple momentum oscillator in the late 1950s.
Stochastics measure the momentum of price. If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price.
The Stochastic oscillator uses a scale to measure the degree of change between prices from one closing period to predict the continuation of the current direction trend.
The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.