Momentum · Indicator
The Stochastic Oscillator shows where the close sits within the recent high-low range, on a 0-100 scale with 80 and 20 as extremes.
Overview
George Lane's Stochastic Oscillator compares the close to its N-period high-low range. %K is the raw stochastic and %D is a smoothed %K, both on a 0-100 scale. Readings above 80 are conventionally called overbought and below 20 oversold. A reading of 100 means the bar closed at the very top of the range covered by the lookback window, and 0 means it closed at the very bottom.
The premise is about where closes occur within ranges. Lane observed that in an advancing market closes tend to cluster near the top of the recent range, and as an advance loses force the closes start falling back towards the middle even while highs are still being made. The oscillator is designed to make that shift visible before it shows up in the price trend.
Because it is normalised to the range, the stochastic is highly sensitive: any narrow-range period will push it to an extreme, since even a small move covers most of a small range. That makes it responsive on shorter timeframes and prone to spending long stretches pinned at the top or bottom of its scale in a trend.
How it is calculated
The raw stochastic expresses the close as a percentage of the distance between the lowest low and the highest high over the %K lookback. That raw series is then smoothed to produce the plotted %K, and %D is a further average of %K, which is why %D is sometimes called the slow line.
With the smoothing set to 1 the plotted %K is the raw value, which is the configuration known as the fast stochastic. The default smoothing of 3 gives the slow stochastic, which is what most traders use because the raw version is extremely jumpy.
Highest = highest high over the last K bars Lowest = lowest low over the last K bars Raw %K = 100 * (close - Lowest) / (Highest - Lowest) %K = SMA(Raw %K, Smoothing) %D = SMA(%K, D)
Inputs
How to read it
The level tells you where closes are landing within the range. A reading near the top means the market has been closing at the strong end of its recent range, which is a sign of buying pressure, not necessarily a sign that price is too high. This distinction matters because strong trends keep the oscillator pinned high for long stretches.
The relationship between %K and %D is the shorter-term read. %K crossing above %D says the most recent closes are landing higher in the range than the recent average, and the reverse for a downside cross. Crossovers that occur in the extreme zones are the traditional signals, and those in the middle of the range are usually ignored.
Because the oscillator saturates, its behaviour at the extremes carries information. In a healthy uptrend the stochastic reaches the overbought zone repeatedly and pulls back only to the middle before turning up again. When it starts reaching only the middle before turning down, the character of the trend has changed.
Signals to look for
%K crossing %D while both are above 80 or below 20 is the classic signal. Traders typically wait for the pair to exit the zone rather than acting on the first crossover inside it.
Price making a new extreme while the oscillator makes a less extreme reading indicates closes are no longer landing at the strong end of the range, which describes a weakening move.
In an established uptrend, a rally that fails to push the oscillator back into the overbought zone shows closes are landing lower in the range than they were, which is read as a loss of trend quality.
Crossing 50 means closes have moved from the lower half of the recent range to the upper half or the reverse, which some traders use as a simple bias filter.
Limitations
Frequently asked questions
The Stochastic Oscillator shows where the close sits within the recent high-low range, on a 0-100 scale with 80 and 20 as extremes.
The level tells you where closes are landing within the range. A reading near the top means the market has been closing at the strong end of its recent range, which is a sign of buying pressure, not necessarily a sign that price is too high. This distinction matters because strong trends keep the oscillator pinned high for long stretches.
Crossover in the extreme zone: %K crossing %D while both are above 80 or below 20 is the classic signal. Traders typically wait for the pair to exit the zone rather than acting on the first crossover inside it.
The oscillator saturates in trends, sitting above 80 or below 20 for extended periods. Treating every such reading as a reversal signal means repeatedly trading against a persistent move.
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