Stochastic Oscillator

The Stochastic oscillator compares the closing price to the price range over a set period. It oscillates between 0 and 100. Values above 80 indicate overbought; below 20 indicate oversold. The indicator has two lines: %K (fast) and %D (slow, signal line).

Stochastic is calculated as: %K = (Current Close - Lowest Low) / (Highest High - Lowest Low) × 100. %D is typically a 3-period SMA of %K. The default settings are 14, 3, 3 (period, %K smoothing, %D smoothing). The lines oscillate, and crossovers between %K and %D can signal entries.

Common signals

1. Overbought/oversold: Sell when Stochastic is above 80; buy when below 20. Works best in ranging markets.
2. Crossover: When %K crosses above %D in oversold zone, consider a long. When %K crosses below %D in overbought zone, consider a short.
3. Divergence: Bullish when price makes lower low but Stochastic makes higher low; bearish when price makes higher high but Stochastic makes lower high.

Default 14, 3, 3. Use 5, 3, 3 for faster signals on short timeframes. Use 21, 5, 5 for slower, smoother signals on swing trading.

Avoid using Stochastic alone in strong trends—it can stay overbought or oversold for long periods. Do not ignore the crossover in favor of raw levels. Combine with trend filters.