Stochastic was originally an engineering term and relates to what the value is relative to what it has been. The Stochastic uses a 0 to 100% scale. If it is 0, then (after averaging) it is the cheapest it has been it 5 days. If it 100% (after averaging), then it is the most expensive it has been in 5 days.

When a stock price moves up, it does so in a zig zag fashion. The price will move up to a higher peak then fall down to a trough. To continue the trend, we want the stock to get to a higher price than previous peak and establish a new higher peak. By doing so, the stock will stay close to the most expensive price it has been recently, if not the most expensive it has been. With our stochastic, this means a value of around 75 to 100%.

To calculate the Stochastic, we first subtract the lowest low during the last 5 days from today's close.

CL = Close (today) - Lowest Low

We then take the lowest low from the highest high to give us a range for those 5 days.

HL = Highest High - Lowest Low

These two figures are then expressed as a ratio.

Stochastic = CL / HL x 100%

To smooth this line, we then calculate a 5 day moving average of this value and this is what we see on the graph.

When the Stochastic line crosses up through 30%, the Stochastic is bullish. If the line then crosses back down through 30%, it becomes bearish again.

When this Stochastic line crosses down through 70%, then the Stochastic is bearish. If the line then crosses back above 70%, it becomes bullish again

In the example above, you will see that the Stochastic line crossed up through the 30% line the same day that the MACD went positive. The Stochastic then stays above the 70% line for around 10 days before the fall half way through the trend makes it drop below the 70% line temporarily (thus making it bearish).

This fall however is not strong enough to push the MACD into bearish territory and the price quickly recovers. The Stochastic becomes bullish again soon after by crossing above the 70% line. The Stochastic continues on above the 70% line.