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Stochastic oscillator is indicator in technical analysis created by George Lane. Stochastic is a Greek word for ‘random’, and in the context of trading, refers to using past actions to forecast a future state. Oscillator refers to repetitive variations up or down the equilibrium position.

It belongs to oscillators and measures the relative position of the closing prices compared to the amplitude of price oscillations in a given period. The indicator is based on the assumption that as prices rise, the closing price tends towards the values that belong to the upper part of the area of price movements in the preceding period. When prices fall, the opposite is true.

Understanding Stochastic Oscillator

The Stochastic Oscillator consists of two lines. When both lines are included on a price chart, it is referred to as the full stochastic. The two lines are:

1. %K, also known as “stochastic fast”, tracks the current market rate for the currency pair.

2. %D, known as the signal line, typically uses the last three valuations of %K to create a moving average of the %K stochastic. Because %D is a moving average of %K, it is referred to as "stochastic slow"since it reacts more slowly to market price changes than %K.

When these two lines intersect, it signals that a trend shift may be approaching. 

1. If the %K Stochastic crosses over and moves above the %D Stochastic, the interpretation is that the market rate is gaining at a faster rate than the average represented by the %D Stochastic. This increase in price strength is considered a buy signal.

2. A sell signal is the result of the %K Stochastic crossing under the %D Stochastic because the faster moving %K line is declining