Developed by: George Lane
Purpose: To determine momentum and identify trend reversal
A very helpful and easy-to-use indicator in technical analysis, the Stochastic Oscillator helps traders determine the point at which a trend might be ending by identifying overbought and oversold conditions.
As an oscillator, the Stochastic ranges between a scale of 0 and 100. When its two lines move above 80 (the horizontal, red dotted line), then the market is overbought. When the lines move below 20 (the horizontal, blue dotted line), then the market is oversold.
As shown in the chart above, overbought and oversold market conditions are soon followed by a reversal in the trend.
So how does the Stochastic help you as a trader? Well, when the market is overbought you can expect a downtrend to occur, meaning that you should sell. When the market is oversold, you can expect an uptrend to follow, which means that you should buy.