In the 1950's Dr. George Lane, a financial analyst, promoted the stochastics oscillator, which measures momentum and uses support and resistance levels. This indicator refers to the location of a current price in relation to its price range over a period of time. This method would attempt to predict price turning points by comparing the closing price of a security to its price range.
This can be useful at spotting overbrought or oversold conditions. It is now a widely used method and is generally based on the closing price compared to the range in which the price traded during the day. When they are up at extreme levels, the probability of a price reversal is greater. Like waves, they tend to go up and down. Rising stochastic tend to occur as a price rises. Rising, in neutral area, means the line is rising, neither overbrought or oversold, but somewhere close to the middle, usually on the way up. Declining of course referred to the opposite, a decline line headed towards oversold but close to the middle area with a way to go to oversold.
They can sometimes staying at the extremes of a while, so it is best to use this indicator in conjunction with others. According to Lane, this oscillator is to be used with cycles, Elliot Wave Theory and Fibonacci for timing.
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