These  oscillators   measure overbought/oversold situations, divergence and trading signals.

These oscillators are based on the following observations; - in an uptrend, the closing price is usually closer to the high of the price range, whereas, in a downtrend the closing price is usually near to the low of the price range.

The Stochastic oscillator uses two lines: %K(sometimes called %A)=Percent Alert line, and %D line which is the Percent Definite line.

The formulae used to determine both lines are given using a popular parameter set of 5 and 3 days.

The percent alert line is found by: %K = 100 x (C-L5) / (H5-L5).

where C= last close or latest price. L5 = lowest low during the last 5 days or events. H5 = highest high during the last 5 days.

%K represents a measure (on a % basis) of the latest price within a price range for a chosen period, in this case 5 days.

A high reading means the closing or latest price is near or equal to the top of the price range.  A low reading means the closing or latest price is near or equal to the bottom of the price range.

The percent definite line is found by:%D = 100 x H3/L3.  %D is a three day or event moving average of %K.

where h3 = 3 day sum of (C-L5) and l3 = 3 day sum of (H5-L5).

The same 75 and 25 values are used to identify overbought/oversold situations.

A slower stochastic is sometimes preferred to counteract whipsawing and act as a filter. In this case the %K line is dropped and the formula for the regular %D becomes the new slow %K line (%Kn). %Dn = 3 day moving average of %Kn. The parameters to be input in this case would then be 5-3-3.