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Stochastic Oscillator

March 15, 2014

The stochastic oscillator is a momentum indicator developed by George Lane in the late 1950s. It measures the relationship between a security’s closing price and its trading range (high-low price range) over a predetermined time period.

The premise is that closing prices should predominantly close in the same direction as the prevailing trend. In other words, during an upward trend, prices should be closing near the highs of the trading range while during a downward trend, prices should be closing near the lows of the trading range.

Technicians use the stochastic oscillator to measure the continued momentum and strength of the prevailing trend. To paraphrase Lane, the oscillator doesn’t follow price or volume, but instead follows the speed or momentum of price; and momentum changes direction before price.

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Recent Articles

First Quarter 2014

The Mass Index

Using a high-low price range to identify potential trend reversals based on range expansions.

Fourth Quarter 2013

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Using pivot points to identify support and resistance levels.

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The Ulcer Index

Measuring the breadth and duration of an investment’s or portfolio’s drawdown while ignoring upside volatility.

Second Quarter 2013

Rate of Change Indicator

Measuring price momentum with the rate of change (ROC) oscillator, which shows the speed at which prices are changing.