Stochastic Oscillator

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.

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.

• 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

Buy signals

• %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

Sell signals

• %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

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

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

| Condition | Description | |-----------|-------------| | STOCH(14) < 20 | Price in oversold zone | | 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 |

• 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