Stochastic Oscillator
A stochastic oscillator is a momentum indicator that compares a security's closing price to its price range over a given time period. They are the most efficient way to tell if a security is overbought or oversold. The reason why it is so effective at doing this is because it does not follow the price exactly, it compares the current price with the most recent prices. The oscillator's sensitivity to market movements can be reduced by adjusting the time periods. There are a variety of oscillators out there, but the most commonly used one is called the RSI or relative strength index. It is calculated using the formula shown below. There are many way to use the RSI. One example would be to sell when RSI goes beyond the 70% which is usually marked by a green line. Sometimes the security will keep on moving up even though it goes beyond the 70%, because of this, it's better to sell when the RSI crosses back below the 70%. Good entry points are when the RSI is below the 30% level and breaches that level as it moves up.
RSI = 100 - 100/(1 + RS)
RS = Average of x days' up closes / Average of x days' down closes.
RSI = 100 - 100/(1 + RS)
RS = Average of x days' up closes / Average of x days' down closes.