The stochastic oscillator is a popular technical indicator and widely used trend-following momentum indicator. Developed by George Lane in the 1950s, the stochastic oscillator measures the momentum of an asset's price, which is often used to predict reversals. This oscillator oscillates around the mean of an asset's price, usually between 0 and 100.

When the stochastic oscillator reads above 80, this indicates that an asset is overbought and when it reads below 20, it indicates that an asset is oversold. This reading provides the investor with a heads up signal regarding possible reversals in the direction of the asset's price.

To calculate the stochastic oscillator, you need to measure recent prices on a scale of 0 to 100, as mentioned above. The formula for the stochastic oscillator requires three inputs: the recent low, the recent high and the current closing price. This helps to measure the distinction between the asset's current rate and its highest and lowest prices over a period of time.

A positive reading of the stochastic oscillator usually indicates the market is trending up and the price is expected to move further up. On the other hand, a negative reading of the oscillator usually indicates the market is trending down and the price is expected to move further down.

The stochastic oscillator is used for many purposes, such as determining when the trend is overbought or oversold, as well as predicting short-term price swings. As it is a momentum indicator, it is also used to time entry points into markets. By incorporating different price timeframe combinations, such as the daily and weekly timeframes, the stochastic oscillator can be used to anticipate reliable reversals or takeaways in the market.

Overall, the stochastic oscillator is an important technical indicator and can be used to identify the potential direction of the market. With its wide range of applications and focusing on relative price movements, the stochastic oscillator is a valuable tool for any investor.