What is a random shock index Stochastic ollator?

Random momentum index, English is Stochastic oscillator It is a momentum index that evaluates the speed and change of the price trend through the average price of the closing price and a certain period of time.

The random momentum index was proposed by George C.Lane in the late 1950s, mainly composed of two lines:%K line (fast line) and%D (slow line or signal line).Crossing and location to identify the trend of buying and selling, and predicting prices.

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How is the random shock index calculated?
How to use random shock indicators?
What are the limitations of random shock indicators?
More technical analysis indicators

How is the random shock index calculated?

Random shock indicators are consisted of two important indicators:%K line and%d line.

%K-line is a fast line, which directly reflects the position of the price within a certain period of time (such as 14 days).

The%D line is a slow-speed line, usually the moving average of the%K line, used for smooth%K-line fluctuation.

The calculation method of %K-line is as follows:

Among them, the “current closing price” is the recent closing price, and the “highest price (selected period)” and “minimum price (selected period)” are the highest and lowest prices for a period of time.This period is usually 14 days, but can be adjusted as needed.%K-line measures market momentum by reflecting the price in its recent high and low interval.

%D line is the moving average of%K line, and the calculation method of%D line is to take the simple average of the%K line value of the recent several cycles (such as 3 cycles).

For example, if the 3 -day period is used, the value of the%D line will be the average of the%K line value in the past three days.Such a calculation makes the%D-phase change more smooth for the%K-line, reflecting the mid-term trend of market dynamics.

How to use random shock indicators?

1.Identification Superblock

Superb buying area: When the%K line and%D line rose to more than 80, the market may enter the super-buying state, which may mean that the price is about to decline.
Superbia: When the%K line and%D line drop below 20, the market may enter the oversold state, which may mean that the price is about to rise.

2.Cross

The crosses of%K-line and%D are often considered a signal for buying and selling.

Buy signal: When the%K line passes through the%D line from below, especially in the oversold area (below 20), this is usually regarded as a buying signal.
Sell signal: When the%K line passes down the%D line down from the top, especially in the super-buying area (above 80), this is usually regarded as a selling signal.

3.Disposter

Disterium refers to the phenomenon of inconsistent trend of the stock price and random shock indicators.Disposal is usually regarded as a potential trend reversal signal.

For example, if the stock price is innovative, but the random shock indicator fails to reach a new high, this is called the divergence, which may indicate the decline in the stock price.

On the contrary, if the stock price is low, but the random shock index has not hit the new low, this is called the departure, which may indicate that the stock price rises.

What are the limitations of random shock indicators?

Lag: As an indicator based on historical data, it may lag behind the actual changes in the market.

Fake signal: In a market where fluctuations or trends are not obvious, random shock indicators may generate misleading signals.

Therefore, you need to consider the random shock index with other technical indicators and the basic of investment targets to get a more objective judgment.