Stochastic (14, 3, 3) (STOCH)
Stochastic Oscillator 14 3 3 (STOCH) is a range bound momentum oscillator. The Stochastic 14 3 3 indicator is designed to display the location of the close compared to the high/low range over a user defined number of periods.
Stochastic Oscillator 14 3 3 is used to:
(1) Identify overbought and oversold levels
(2) find divergences and
(3) identify bull and bear set ups or signals.
Meaning of Stochastic 14 3 3 indicator
Stochastic 14 3 3 meaning: STOCH 14 3 3 is a range-bound oscillator consisting of two lines that move between 0 and 100. The first line (known as %K) displays the current close in relation to a user-defined period’s high/low range. The second line (known as %D) is a simple moving average of the %K line. Now, as with most indicators, all of the periods used within Stochastic 14 3 3 can be user defined. That being said, the most common choices are a 14 period %K and a 3 period SMA for %D.
The basic understanding is that Stochastic 14 3 3 uses closing prices to determine momentum. When prices close in the upper half of the look-back period’s high/low range, then the Stochastic Oscillator 14 3 3 (%K) rises also indicating an increase in momentum or buying/selling pressure. When prices close in the lower half of the period’s high/low range, %K falls, indicating weakening momentum or buying/selling pressure.
Much like with any range-bound indicator, Overbought/Oversold conditions are a primary signal generated by the Stochastic Oscillator 14 3 3. The default thresholds are 20 for oversold and 80 for overbought.
It is typically best to trade along with the trend when using Stochastic 14 3 3 to identify overbought/oversold levels. The reason is that overbought does not always mean a bearish move just like oversold does not always mean a bullish move. Many times overbought (oversold) conditions can be a sign of a strengthening trend and not necessarily an impending reversal.
The Stochastic Oscillator 14 3 3 is usually plotted with a 3-day simple moving average that acts as the trigger line. When the Stochastic Oscillator 14 3 3 crosses above the trigger line it is a bullish moving average crossover, and when it crosses below it is bearish.