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What is %K in Technical Analysis?

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If you are familiar with technical analysis, you might have come across the symbol “%K”. So what does this symbol mean? Read on to know the answer.

In technical analysis, charts, technical indicators, moving averages and market indicators are used to identify patterns that can suggest future price movements. One of the commonly used technical indicators among traders today is Stochastic Oscillator.

According to Investopedia, Stochastic Oscillator is a technical momentum indicator that compares a security’s closing price to its price range over a given time period. The oscillator’s sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result.

The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the “%K” crosses through a three-period moving average called the "%D".

In a Stochastic Oscillator chart, the Stochastic Oscillator is displayed as two lines. The first line is the %K, which compares the latest closing price to the recent trading range. The second line is the %D, which is simply a moving average of the %K. Between the two lines, %D is the more important line and followed closely by traders as it will indicate any major signals in the chart.

Calculating the Stochastic Oscillator

To calculate the %K:

%K = 100[(C – L14)/(H14 – L14)]

C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period.

To calculate the %D:

%D = 3-period moving average of %K

Reading the Stochastic Oscillator Chart

Stochastic Oscillator

The %K line in a Stochastic Oscillator chart is usually displayed as a solid or blue line while the %D line is usually displayed as a dotted or red line.

There are 2 main levels to lookout for when you use Stochastic Oscillator. One is the overbought level which is represented by 80 while the other is oversold level which represented by 20.

When %K or the %D line crosses above the 80 level, it is a bearish signal, which is a signal to enter into a short position.

When %K or the %D line crosses below the 80 level, it is a bullish signal, thus it is a sign to enter into a long position.

### Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.

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