Stochastic Oscillator

Question 1

%K and %D

Answer 1

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100 %D = 3-day SMA of %K

Question 2

Low, high and %K

Answer 2

Lowest Low = lowest low for the look-back period Highest High = highest high for the look-back period %K is multiplied by 100 to move the decimal point two places

Question 3

Standard period

Answer 3

14 days

Question 4

Overbought

Answer 4

80

Question 5

Oversold

Answer 5

20

Question 6

Bullish divergence

Answer 6

A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a higher low. This shows less downside momentum that could foreshadow a bullish reversal

Question 7

Bearish divergence

Answer 7

A bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a lower high. This shows less upside momentum that could foreshadow a bearish reversal

Question 8

Bullish divergence confirmation

Answer 8

A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above 50

Question 9

Bearish divergence confirmation

Answer 9

A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50

Question 10

Bull set-up

Answer 10

The underlying security forms a lower high, but the Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high, the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next decline is then expected to result in a tradable bottom

Question 11

Bear set up

Answer 11

A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a lower low. Even though the stock held above its prior low, the lower low in the Stochastic Oscillator shows increasing downside momentum. The next advance is expected to result in an important peak