Stochastic

Stochastic is a momentum indicator that measures how far from the equilibrium level a share price is. Stochastic is a popular technical indicator because it provides well-defined buy signals and sell signals.

Stochastic consists of two different graphs that are called %K and %D. Buy signals and sell signals in stochastic are generated when the %K-curve cuts through the %D curve if %K and %D is at overbought levels or oversold levels. The %D-curve and the %K-curve can assume values between 0 and 100 in stochastic. A value lower than 20 means that the stock is oversold and a value higher than 80 means that the stock is overbought. Commonly, the %K-curve is calculated for 5 days and the %D-curve for three days.

Stochastic can be both quick and slow. Fast stochastic is more sensitive than the slow stochastic and the fast stochastic will therefore generate more signals compared to slow stochastic.