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Double Stochastic Oscillator

The Double Stochastic Oscillator is a deviation from the Stochastic Oscillators developed by George C. Lane in the 1950's. The Double Stochastic Oscillator can be interpreted in the same manner as other Stochastic Oscillators. Like the original Stochastic Oscillators, it is a momentum indicator designed to show the relation of the current close price relative to the high/low range over a given number of periods using a scale of 0-100. It is based on the assumption that in a rising market the price(s) will close near the high of the range and in a declining market the price(s) will close near the low of the range.

The Double Stochastic Oscillator is plotted as 2 lines: %K and %D. %K is the main (fast) line and %D is the signal (slow) line.

The Double Stochastic Oscillator is calculated by the formula:

Fast %K = ((Today's Close - Lowest Low in %K Periods) / (Highest High in %K Periods - Lowest Low in %K Periods)) * 100

Slowing %K = N-period moving average of Fast %K

Double %K = ((Today's Slowing %K - Lowest Low Slowing %K in %K Periods) / (Highest High Slowing %K in %K Periods - Lowest Low Slowing %K in %K Periods)) * 100

Double Slowing %K = N-period moving average of Double %K

%D = 3-period simple moving average of Double Slowing %K

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Interpretation

There are three basic techniques for using the Double Stochastic Oscillator to generate trading signals.

Crossovers: 1) %K line / %D line Crossover: A buy signal occurs When the %K line crosses above the %D line and a sell signal occurs when the %K line crosses below the %D line. 2) %K line / 50-level Crossover: When the %K line crosses above 50 a buy signal is given. Alternatively, when the %K line crosses below 50 a sell signal is given.

Divergence: Looking for divergences between the Double Stochastic Oscillator and price can prove to be very effective in identifying potential reversal points in price movement. Trade long on Classic Bullish Divergence: Lower lows in price and higher lows in the Double Stochastic Oscillator; Trade short on Classic Bearish Divergence: Higher highs in price and lower highs in the Double Stochastic Oscillator.

Overbought/Oversold Conditions: The Double Stochastic Oscillator can be used to identify potential overbought and oversold conditions in price movements. An Overbought condition is generally described as the Double Stochastic Oscillator being greater than or equal to the 80% level while an oversold condition is generally described as the Double Stochastic Oscillator being less than or equal to the 20% level. Trades can be generated when the Double Stochastic Oscillator crosses these levels. A buy signal occurs when the Double Stochastic Oscillator declines below 20% and then rises above that level. A sell signal occurs when the Double Stochastic Oscillator rises above 80% and then declines below that level.

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