The theory behind the stochastic oscillator, a well-known momentum indicator is that prices tend to close towards their highs during an uptrend and prices tend to close towards their lows during market downtrends.
The stochastic indicator is similar to the parabolic SAR in that it's hard to calculate but easy to interpret. If the indicator drops below the cutoff line then it's a buy signal. If it goes above the cut off line then it's a sell signal. The stochastic indicator is an oscillator indicator, which ranges between 0 and 100. Anything above 80 is a sell signal while anything below 20 is a buy signal. The more closes there are towards the highs, the higher the oscillator will range. That means it's more likely that the market is overbought and will reverse sometime soon. The opposite is true with an undersold market.
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