# How does Stochastic Work? (Starting to respond questions on page timeline. Please ask your questions with clarity https://www.f…

How does Stochastic Work?

A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0β100 bounded range of values.

The formula for Stochastic Oscillator is given below:

%K = (C-L14/H14-L14) x 100

While; C = The most recent closing price
L14 = The lowest price traded of the 14 previous
H14 = The highest price traded during the same
14-day period
%K = The current value of the stochastic indicator

Notably, %K is referred to sometimes as the fast stochastic indicator. The “slow” stochastic indicator is taken as %D = 3-period moving average of %K.

The general theory serving as the foundation for this indicator is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low. Transaction signals are created when the %K crosses through a three-period moving average, which is called the %D.

The difference between the slow and fast Stochastic Oscillator is the Slow %K incorporates a %K slowing period of 3 that controls the internal smoothing of %K. Setting the smoothing period to 1 is equivalent to plotting the Fast Stochastic Oscillator.

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