George Lane

George Lane (1921-2004) was a highly influential figure in the world of technical analysis. A stock trader, author, and educator, Lane is best known as the father of the Stochastic Oscillator, one of the most popular momentum indicators used by traders today. Developed in the 1950s, the Stochastic Oscillator was born from a simple but powerful observation: as an asset's price trends upwards, its daily closing price tends to cluster near the high of its recent price range. Conversely, in a downtrend, the close gravitates towards the low. Lane translated this insight into a mathematical formula that helps traders identify potential trend reversals, particularly when an asset becomes overbought or oversold. His work wasn't just about creating an indicator; it was about teaching a new way to interpret market psychology and momentum, a legacy that continues to influence traders across the globe.

George Lane was more than just an inventor; he was a market practitioner and a passionate teacher. He began his career in the 1950s and quickly gained a reputation as a shrewd trader. But his true passion was education. Lane believed that the principles of successful trading could be taught, and he spent decades sharing his knowledge through seminars, courses, and as president of Investment Educators Inc. He was known for his folksy, down-to-earth teaching style, which made complex market theories accessible to ordinary people. While he is almost singularly credited with the Stochastic Oscillator, Lane was always quick to point out that it was developed in a collaborative environment with a group of fellow analysts. This humility and focus on education, combined with his groundbreaking technical work, cemented his status as a legend in the trading community.

The Stochastic Oscillator isn't just a random set of lines on a chart; it's the result of Lane's keen observation of price behavior. He wanted a way to measure the momentum of price changes to get an early warning before a trend reversed.

This was Lane’s “aha!” moment. Think of a cyclist pedaling up a steep hill. Before they actually stop and start rolling backward, their forward speed (momentum) will decrease significantly. They're still moving up, but much more slowly. Lane believed the stock market acts in the same way. The momentum of a price rally often fades before the price itself peaks and turns down. The Stochastic Oscillator is designed to measure this very slowdown. It tells you not just where the price is, but the speed and conviction behind its recent move.

The indicator measures where a stock's price closed relative to its high-low range over a set period (typically 14 days). This is plotted on a scale from 0 to 100. Don't worry about the complex formula; just focus on what the readings mean:

• Over 80: When the indicator moves above 80, it's considered overbought. This doesn't automatically mean “sell,” but it's a yellow flag. It suggests the recent buying frenzy may be overextended and the stock could be due for a pullback.
• Under 20: When the indicator drops below 20, it's considered oversold. This signals that the recent selling pressure may be excessive and the stock could be poised for a bounce.
• Divergence: This is the most powerful signal Lane taught. A divergence occurs when the price and the oscillator tell different stories. For example, if the stock's price hits a new high but the Stochastic Oscillator makes a lower high, it's a bearish divergence. This is a major red flag, suggesting the upward momentum is failing and a reversal could be imminent.

So, why should a value investor, who pores over balance sheets and income statements, care about a squiggly line on a chart? Because even the best companies can have their stock prices bounce around due to market noise. Lane’s tool can help you be a smarter buyer. Imagine you've done your homework. You've used fundamental analysis to identify a wonderful company selling at a fair price. Now, when do you pull the trigger? Instead of buying immediately, you could glance at the Stochastic Oscillator.

1. If it shows the stock is extremely overbought (above 80), it suggests market enthusiasm is high. Perhaps you wait a few days or weeks for the excitement to cool off, allowing you to get a better entry point.
2. If it shows the stock is deeply oversold (below 20), it could signal that market sentiment is overly pessimistic. This might present an excellent opportunity to buy your chosen company at an even bigger discount to its intrinsic value.

For the value investor, the Stochastic Oscillator is never the reason to buy, but it can be an excellent guide for when to buy. The ‘what’ is determined by value; the ‘when’ can be refined by George Lane’s timeless insights into market momentum.