Question 1

What is Stochastic?

Accepted Answer

The Stochastic Oscillator is a momentum indicator developed by George Lane in the late 1950s. It compares a security's closing price to its price range over a given period. The indicator oscillates between 0 and 100 and is used to identify overbought and oversold conditions.

Question 2

How it works

Accepted Answer

The Stochastic Oscillator consists of two lines — %K (fast) and %D (slow signal): ``` %K = ((Close - Lowest Low(N)) / (Highest High(N) - Lowest Low(N))) * 100 %D = SMA(%K, D_period) ``` Where N is the lookback period (default 14) and D_period is the smoothing period for %D (default 3). %K represents the current close relative to the high-low range. %D is a smoothed version of %K used as a signal line.

Question 3

Key levels

Accepted Answer

- **Above 80** — Overbought zone (price near the top of its range) - **Below 20** — Oversold zone (price near the bottom of its range) - **50** — Midpoint, can act as support/resistance in trending markets

Question 4

Buy signals

Accepted Answer

- %K crosses above %D in the oversold zone (below 20) - Stochastic rises above 20 from below (exit oversold) - Bullish divergence: price makes lower low, Stochastic makes higher low

Question 5

Sell signals

Accepted Answer

- %K crosses below %D in the overbought zone (above 80) - Stochastic falls below 80 from above (exit overbought) - Bearish divergence: price makes higher high, Stochastic makes lower high

Question 6

Parameters

Accepted Answer

| Parameter | Default | Description | |-----------|---------|-------------| | K Period | 14 | Lookback period for %K | | D Period | 3 | Smoothing period for %D |

Question 7

Sub-components

Accepted Answer

| Component | Description | |-----------|-------------| | `STOCH(14)` | %K line value | | `STOCH_D(14)` | %D signal line value |

Question 8

Example conditions

Accepted Answer

| Condition | Description | |-----------|-------------| | `STOCH(14) 80` | Price in overbought zone | | `STOCH(14) cross_over STOCH_D(14)` | Bullish crossover | | `STOCH(14) cross_under STOCH_D(14)` | Bearish crossover | | `STOCH(14) cross_over 20` | Exit oversold zone | | `STOCH(14) cross_under 80` | Exit overbought zone |

Question 9

Tips

Accepted Answer

- Stochastic works best in ranging or sideways markets - In strong trends, the oscillator can remain overbought or oversold for extended periods — do not fade the trend - Use %K/%D crossovers only in the extreme zones (below 20 or above 80) for higher probability signals - Combine with trend indicators (moving averages, ADX) to filter signals - Divergences between price and Stochastic are powerful reversal signals - Shorter periods increase sensitivity but produce more false signals