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momentumintermediate

Stochastic Oscillator

Stoch

The Stochastic Oscillator compares a security's closing price to its price range over a specific period. It oscillates between 0 and 100, with readings above 80 considered overbought and below 20 oversold. It consists of two lines: %K (fast) and %D (slow/signal).

Interactive Chart

72.00
Stoch

Parameters

Lookback period for %K calculation.

Smoothing period for %D (signal line).

Current Reading

Oversold
Neutral
Overbought
0205080100
72.0Neutral

Quick Answer

Compares closing price to price range over a period. Developed by George Lane in the 1950s, the Stochastic Oscillator measures momentum by comparing a closing price to its range over a period. The theory is that in an uptrend, prices close near the high, and in a downtrend, they close near the low..

Trading Signals

Bullish %K/%D Cross

Bullish

%K crosses above %D in oversold territory

%K > %D (below 20)

Bearish %K/%D Cross

Bearish

%K crosses below %D in overbought territory

%K < %D (above 80)

Overbought

Bearish

Both lines above 80

%K, %D > 80

Oversold

Bullish

Both lines below 20

%K, %D < 20

What is the Stochastic Oscillator?

Developed by George Lane in the 1950s, the Stochastic Oscillator measures momentum by comparing a closing price to its range over a period. The theory is that in an uptrend, prices close near the high, and in a downtrend, they close near the low.

How to Read Stochastic

The %K line is the main indicator. The %D line is a moving average of %K. Readings above 80 suggest overbought conditions; below 20 suggest oversold. Look for crossovers between %K and %D, similar to MACD signal line crossovers.

Trading Signals

Key signals: %K crossing %D (bullish when %K crosses above, bearish when below), overbought/oversold crossbacks, divergences with price, and failure swings where indicator fails to reach previous extreme before reversing.

Trading Strategies

In ranging markets, buy when %K crosses above %D in oversold zone, sell when %K crosses below %D in overbought zone. In trending markets, use Stochastic to time entries on pullbacks - buy when oversold in uptrend.

Formula

Formula
%K = ((C - L14) / (H14 - L14)) × 100
%D = 3-period SMA of %K
C = Current Close, L14 = Lowest Low, H14 = Highest High

Tips & Common Mistakes

Pro Tips

  • •Use slower settings (21, 7, 7) to reduce false signals
  • •Look for divergences with price for stronger signals
  • •Combine with trend direction for context
  • •Crossovers in extreme zones are most significant

Common Mistakes

  • •Trading overbought/oversold without waiting for crossovers
  • •Ignoring divergences which are strong signals
  • •Using in strongly trending markets (stays overbought/oversold)
  • •Not adjusting settings for different timeframes

Best Used With

Moving AveragesSupport/ResistanceVolume
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