Stochastic Oscillator

1. Developed by George C. Lane in the late 1950s
2. Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. 
3. Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price.
4. As a rule, the momentum changes direction before price." 
5. As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. 
6. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. 
7. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

Setting

Calculation:

%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.

%D = 3-period moving average of %K

The default setting for the Stochastic Oscillator 
is 14 periods, which can be days, weeks, months or
an intraday timeframe. A 14-period %K would use 
the most recent close, the highest high over the last
14 periods and the lowest low over the last 14 periods.
%D is a 3-day simple moving average of %K. This line is
plotted alongside %K to act as a signal or trigger line.

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". 

Further reading : stockcharts.com