Stochastic oscillator
Family VI · Charts & indicators
Not to be confused with rsi, williams percent range, cci indicator.
Stochastic oscillator is a momentum indicator that measures the position of a closing price relative to the high-low range over a chosen lookback period. It produces two lines, %K and %D, that oscillate between 0 and 100. The indicator is used to gauge overbought and oversold conditions and to spot potential reversals.
Calculation and interpretation
The %K line is calculated as: (latest close − lowest low) ÷ (highest high − lowest low) × 100, where the highest high and lowest low are taken over the lookback period (commonly 14 periods, though this varies by trader and market). The %D line is a moving average of %K, typically a 3-period simple moving average, and acts as a signal line.
Readings above 80 are often considered overbought, and readings below 20 oversold, but these thresholds are not universal and should be adjusted for the market and timeframe. Crossovers of %K and %D, as well as divergences between the oscillator and price, are common signals.
Worked example
Assume a 14-period stochastic on a stock. Over the last 14 days, the highest high is $55 and the lowest low is $45. The latest close is $53.
The %K value of 80 is at the upper end of the range, suggesting the close is near the top of its recent range. If the 3-period moving average of %K (the %D line) is 75, the %K line is above %D, which some traders interpret as bullish momentum.
Variations and usage
There are three main types: fast, slow, and full stochastics. Fast stochastic uses the raw %K and a 3-period %D; slow stochastic smooths %K with a 3-period moving average before calculating %D, reducing noise; full stochastic allows custom smoothing of both lines. The choice depends on the trader's preference and the market's volatility.
The indicator performs differently in trending versus ranging markets. In strong trends, it can remain in overbought or oversold territory for extended periods, generating false reversal signals. It is often combined with trend filters or other indicators to improve reliability.
Often confused with
- rsi
- RSI (Relative Strength Index) is a bounded momentum oscillator, scaled from 0 to 100, that compares the average size of recent gains with the average size of recent losses over a chosen lookback period.
- williams percent range
- Williams %R is a momentum oscillator that measures the level of the close relative to the highest high over a lookback period, expressed as a negative percentage between 0 and -100.
- cci indicator
- The Commodity Channel Index is a momentum oscillator that measures the difference between a typical price and its simple moving average, divided by mean absolute deviation, and is plotted on a bounded scale.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci