Contents

#### What Is Stochastic Oscillator(KD)

The KD indicator is the top 3 of popular indicator used by the investors when analyzing the market. It was published by George C. Lane. It is also called as stochastic oscillator. Since its publication in 1957, it has been used for more than 60 years.

Concept:
1. When a stock trends upwards, its closing price tends to trade at the highest price fluctuation of the day.
2. When a stock trend downwards, its closing price tends to trade at the lowest price fluctuation of the day. Therefore, the KD indicator is an important indicator used to “judge the trend of stock price strength” and “find the turning point”.

#### The formula and principle of KD indicator

Although the KD indicator is quite famous, if you don’t understand it in depth, you must be afraid to use it in actual trading. So let’s get a good understanding of this indicator now!

The commonly used parameters of the KD indicator are (9,3,3)

• 9 as the period parameter
• 3 is the smoothing value, used to adjust price weights at different times
• The formula of KD index mainly includes three items: RSV value, %K, %D

Next, we will first explain how to calculate the RSV value

RSV
value
It is called as Raw Stochastic Value. Let’s take the daily chart as an example, the parameters are (9,3,3). Represent the strength of the closing price of the day in the last 9 days.

Formula
= (Today’s closing price – The lowerst price in the last 9days) / (The highest price in the last 9days – The lowest price in the last 9 days)

Concept : Use the price difference between the closing price of the day and the lowest point to measure the strength of the current price within 9 days

%K value : %K value is the weighted moving average of RSV
Formula:
Today’s %K = (2/3 x Yesterday’s %K) + (1/3 x Today’s RSV value)

%D value : %D value is the weighted moving average of K value
Formula:
Today’s %D = (2/3 x Yesterday’s %D) + (1/3 x Today’s %K)

%D value is the weighted average of the original price twice (RSV, %K), slow response to the trend.
Relative to the %D value, the %K value reacts quickly to the trend.

The meaning of the three elements of KD indicator (RSV, %K, %D)

• RSV reflects the strength of the price in this time interval
• %K reflects the volatility of the day
• %D reflects the trend over a long period of time

The characteristic of the KD indicator is, it can sensitively reflect price changes

• Because the parameters used are small, it can react quickly
• But also because it is too sensitive, it is easy to produce noise (disadvantage)

As for how to use the KD indicator in the market? We will introduce for you in the next part.

#### Risk reminder

• Most of the time, the market will still be affected by market news and will not follow the established pattern.
• Investors can match other technical indicators to improve trading winning rate
• The most important for investment is set ready the profit and stop loss before entering the market
• Once the stop loss is broken, you must keep your promise and leave the market to protect your capital

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