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Oscillators: Stochastic
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The stochastic indicator has been developed by Georges Lane. This indicator has been build based on the following concept:

• In a positive trend, if the price is close to his maximum value, the intra day closing price will tend to be closer and closer to his intra day high.
• In a negative trend, if the price is close to his minimum value, the intra day closing price will tend to be closer and closer to his intra day low.

This system uses two lines: %K and %D.

With:

n the chosen lag.
C_t the stock price at the date t.
B_n the lowest price during the last n days.
H_n the highest price during the last n days.

The stochastic %K is:

%K= 100 * {(C-B_n)/(H_n-B_n)}

The second step is to compute the %D. 

%D is the moving average at j days of the numerator of  %K (Nj) divided by the moving average of the denominator of %K (Dj).

Interpretation

The stochastic indicator is interpreted like the RSI. The sale signal is given when both lines are over 80% and the purchase signal when both lines are under 20%.

The lag used for n in %K is often 5 days but (9,11 and 14 days are used as well). The lag used for j in %D is often 3. 

Graph Example: Stochastic

The %K line is in red and the %D line is in blue with n=5 and j = 3.