Understanding Indicators
Stochastic Oscillator
Momentum in Range
The Stochastic oscillator compares a closing price to its price range over a period. It shows where the current close is relative to the recent high-low range.
Reading Stochastic
%K: Main line (fast)
%D: Signal line (3-period SMA of %K)
Overbought: Above 80 (price near top of range)
Oversold: Below 20 (price near bottom of range)
%D: Signal line (3-period SMA of %K)
Overbought: Above 80 (price near top of range)
Oversold: Below 20 (price near bottom of range)
Stochastic Signals
Crossovers in extremes:
- %K crosses above %D below 20 → Bullish
- %K crosses below %D above 80 → Bearish
Divergences:
- Same concept as RSI divergences
- %K crosses above %D below 20 → Bullish
- %K crosses below %D above 80 → Bearish
Divergences:
- Same concept as RSI divergences
Stochastic works best in ranging markets. In strong trends, it can stay overbought/oversold for extended periods.
Key Takeaways
- Shows where price closed relative to recent range
- Above 80 = overbought, below 20 = oversold
- Best used in ranging markets
- Crossovers at extremes generate signals