What is the Fast Stochastic Oscillator in Technical Analysis?

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Description: The Fast Stochastic Oscillator is a momentum oscillator developed by George Lane during the late 1950s. The basic function of the Fast Stochastic Oscillator is to compare the current closing price of a security with that of a high-low price range over a certain period of time. Lane recommended using a half-lunar cycle period of 14 days for the same. During various interviews of his time, Lane noted that the indicator measures the momentum of price which often leads an actual price reversal. For example, during an uptrend, prices close near the day’s high, similarly during a strong downtrend prices close near the day’s lows. An anomaly in this behavior often foreshadows a price reversal. Due to this leading nature of the Fast Stochastic Oscillator, it’s one of the most widely used technical analysis indicators around.

Fast Stochastic Oscillator Calculations

The Fast Stochastic Oscillator uses the following formulas in its calculation:

%K = (C-LLV14)/ (HHV14 –LLV14) *100

%D = 3 SMA of %K

Where,

C = Current closing price

LLV14 = The lowest low over the last 14 periods

HHV14 = The highest high over the last 14 periods

Fast Stochastic Oscillator Interpretations

Divergences: According to George Lane, the most important signals to trade off the Fast Stochastic Oscillator are divergences. A bullish divergence occurs when prices make a lower low but the oscillator makes a higher low. Similarly, a bearish divergence occurs when prices make a higher high while the Fast Stochastic Oscillator makes a lower high indicating that the momentum is getting abated which often precedes a price reversal.

Overbought and Oversold: When the Fast Stochastic Oscillator moves above 80, the security is considered as overbought. A sell signal is generated when it dips below the 80 level. Similarly, when the oscillator moves below 20, the security is considered as oversold. A buy signal is generated when it crosses above the 20 level from below.

Crossovers: Crossovers are yet another way to interpret the Fast Stochastic Oscillator. When the oscillator becomes oversold below the 20 level and the %K line crosses over the %D line, we have a Bullish Crossover in place which is essentially a buy signal to go long on the security. Similarly, when the oscillator becomes overbought above the 80 level and the %K line crosses below the %D line, we have a Bearish Crossover in place which is essentially a sell signal to go short on the security.

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