Stochastic Oscillator
A bounded oscillator measuring where price closes relative to its recent extremes: near the highs, the market is strong; near the lows, it is weak.
The Stochastic Oscillator was popularized in the 1950s by George Lane. His starting observation: in an upward move, closes tend to cluster near the period's highs; in a downward move, near the lows. The Stochastic quantifies this position of the close within the recent high-low range, on a 0-100 scale.
Like the RSI, it is a bounded momentum oscillator, but faster and more jittery, which makes it a popular timing tool for refining entries in the direction of an already-identified trend.
How it's calculated
The %K line measures, as a percentage, where the latest close sits between the lowest low and the highest high of the last 14 candles (the default %K period in Screener.Trading). A close exactly at the period's high reads 100; at the low, 0; mid-range, 50. This raw line is then smoothed (smoothing 3 by default), and the %D line (a 3-period moving average of %K) serves as the signal line. Hence the standard settings: %K 14, %D 3, smoothing 3.
Both the %K and %D lines are individually accessible in screener rules, comparable against each other, a static value or a threshold.
How to read it
- Above 80: overbought zone : closes are printing very near the recent highs.
- Below 20: oversold zone : closes are printing very near the recent lows.
- %K/%D crossovers: %K crossing back above %D in the oversold zone is Lane's classic buy signal; the reverse cross in the overbought zone, the sell signal.
- Divergences: a new price low without a new Stochastic low suggests fading selling momentum.
Its responsiveness is also its limitation: in a strong trend, the Stochastic pins itself in an extreme zone and stays there, repeatedly generating premature reversal signals. It is at its best in ranging markets, or as a timing tool within a trend filtered by another indicator.
In the screener
Rule examples you can build in Screener.Trading: "%K below 20 on D1" to list oversold assets; "%K above %D on H4" to detect bullish crossovers; both combined (a bullish cross while %K was below 20 a few candles ago) to approximate Lane's classic signal, using candle offsets.
A multi-timeframe approach suits the Stochastic particularly well: a trend filter on a higher timeframe (close above the 200 SMA on D1, or ADX above 25) and an oversold Stochastic on H1 for entry timing. That way you only take the Stochastic's fast signals in the direction of the underlying current.
In a strong trend, the Stochastic can stay above 80 or below 20 for weeks. Do not treat its extremes as reversal signals without a trend filter.
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- Glossary%K (stochastic)The %K is the main line of the stochastic oscillator: it locates the current close, as a percentage, within the range of the last 14 periods.
- Glossary%D (stochastic)The %D is the 3-period simple moving average of %K and serves as the stochastic oscillator's signal line, whose crosses with %K are the classic signals.
- GlossaryMulti-timeframe analysisMulti-timeframe analysis means studying the same asset across several timeframes, typically a higher one for the trend and a lower one for timing.
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