|The Stochastic Indicator is based on the
observation that as prices increase, closing prices tend to accumulate ever closer to the
highs for the period. Conversely, as prices decrease, closing prices tend to accumulate
ever closer to the lows for the period. Trading decisions are made with respect to
divergence between % of "D" (one of the two lines generated by the study) and
the item's price. For example, when a commodity or stock makes a high, reacts, and
subsequently moves to a higher high while corresponding peaks on the % of "D"
line make a high and then a lower high, a bearish divergence is indicated. When a
commodity or stock has established a new low, reacts, and moves to a lower low while the
corresponding low points on the % of "D" line make a low and then a higher low,
a bullish divergence is indicated. Traders act upon this divergence when the other line
generated by the study (K) crosses on the right-hand side of the peak of the % of
"D" line in the case of a top, or on the right-hand side of the low point of the
% of "D" line in the case of a bottom. The Stochastic Oscillator is displayed as two lines. The main line
is called "%K." The second line, called "%D," is a moving average of
%K. The %K line is usually displayed as a solid line and the %D line is usually displayed
as a dotted line.
The formula for %K is:
The default value for K is 10
(Although 5 Days is the most commonly used value for %K)
Because %D is a moving average of %K a number of days or
periods should be specified when displaying the Lanes Stochastics indicator.