Stochastic Oscillator
The stochastic oscillator shows where price closed relative to its recent range. Learn %K and %D, the 80/20 levels and how to use crossovers in the direction of the trend.
Full name
Stochastic Oscillator (%K and %D)
Default settings
14, 3, 3 (slow stochastic); levels at 80 and 20
Formula
%K = 100 × (close − lowest low of N) / (highest high of N − lowest low of N); %D = 3-period SMA of %K
What it measures
Developed by George Lane in the 1950s, the stochastic oscillator compares the latest close with the high-low range over the last N bars. A reading of 90 means price closed near the top of its recent range; 10 means near the bottom. In uptrends, closes tend to cluster near highs; in downtrends, near lows.
The two lines
- %K is the main line. The "slow" version most platforms use smooths it over 3 periods.
- %D is a 3-period average of %K, used as a signal line.
How to read it
80 and 20
Above 80 is overbought, below 20 oversold. As with RSI, these readings can persist in strong trends, so they aren't buy or sell signals on their own.
Crossovers with the trend
The most reliable use is to take %K crossing above %D from below 20 only when the bigger trend is up. That turns the stochastic into a pullback-timing tool. Reverse it for downtrends.
Divergence
Price making a new low while the stochastic makes a higher low warns that selling pressure is fading.
Stochastic vs RSI
Stochastic is faster and tied to the recent range; RSI is smoother and based on the size of up and down closes. Stochastic suits ranges and short pullbacks; RSI is better for judging momentum strength.
Common mistakes
- Shorting every move above 80 in an uptrend.
- Using the fast stochastic, which is very noisy.
- Trading crossovers in the middle of the range, where they mean little.
See it used for timing in the mean reversion strategy.
Indicators work best inside a plan
See which strategies use this indicator, then size the trade before you enter.