How is %K calculated in the Stochastic indicator?

The calculation of %K in the Stochastic oscillator is designed to measure the closing price of a security in relation to its price range over a specified time period. The correct formula, which is represented by the selected answer, involves taking the difference between the current closing price and the lowest low over that period and then dividing it by the difference between the highest high and the lowest low.

Specifically, the formula is as follows:

%K = 100 x ((Current close - Lowest low) / (Highest high - Lowest low))

This calculation effectively illustrates where the current price is located within the high-low range over the chosen timeframe, providing a perspective on momentum. A higher %K value indicates that the current closing price is nearer to the highest price of that selected period, suggesting potential overbought conditions, while a lower %K value indicates it is closer to the lowest price, suggesting potential oversold conditions.

A clear understanding of this calculation is crucial for traders utilizing the Stochastic oscillator, as it forms the basis for subsequent interpretations and can significantly affect trading decisions.