Stochastic Oscillator
Stochastic Oscillator compares the close to its recent high-low range to show where price sits within the range.
What It Measures
Momentum and overbought/oversold: whether the close is near the top (bullish) or bottom (bearish) of the recent range.
The Math (Simplified)
%K = 100 × (Close - Lowest Low(N)) / (Highest High(N) - Lowest Low(N)), smoothed by a 3-day average. %D is a 3-day average of %K. Crosses mark momentum shifts.
Default Inputs & Tuning
14 days with 3 slowing and 3-signal is classic. Levels 20 (oversold) and 80 (overbought) mirror RSI 30/70.
When It Works (Market Edge)
Ranging markets where price oscillates within a channel: buying when %K crosses above %D near 20 can catch bounces.
When It Fails
Strong trends: stochastic can stay overbought above 80 for weeks in a rally (or below 20 in a crash) — same trap as RSI.
Common Myths
Myth: Stochastic below 20 means price must bounce.
Truth: In a strong downtrend stochastic stays below 20 for long stretches. Oversold is a condition, not a timing signal.
Myth: A stochastic cross is a standalone buy signal.
Truth: Crosses in the middle of the range (40-60) are often noise. The best crosses happen near extremes with confirmation.
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