Level 5 · Lesson 7 of 18 · 6 min read
Stochastic Oscillator
Where is price within its recent range? The Stochastic answers.
Researched and written by Laurent The Core Concept
The Stochastic Oscillator, developed by George Lane in the 1950s, answers a specific question: "Where is the current closing price relative to the price range of the last N periods?"
%K formula:
%K = ((Current Close − Lowest Low) / (Highest High − Lowest Low)) × 100
Example: Over 14 days, Low = 1.0800, High = 1.1000, Today's close = 1.0900
%K = ((1.0900 − 1.0800) / (1.1000 − 1.0800)) × 100 = (0.0100 / 0.0200) × 100 = 50
Price is exactly in the middle of its 14-day range.
%K = ((Current Close − Lowest Low) / (Highest High − Lowest Low)) × 100
Example: Over 14 days, Low = 1.0800, High = 1.1000, Today's close = 1.0900
%K = ((1.0900 − 1.0800) / (1.1000 − 1.0800)) × 100 = (0.0100 / 0.0200) × 100 = 50
Price is exactly in the middle of its 14-day range.
The Two Lines
- %K (the fast line): Calculated directly from the formula above. Reacts quickly to price changes.
- %D (the slow line): A 3-period SMA of %K. Smoother, fewer signals. Most signals are based on %K crossing %D.
Reading the Signals
The Stochastic generates three types of signals:
- Overbought/oversold levels: Above 80 = price is near the top of its recent range (overbought). Below 20 = price is near the bottom (oversold). Same caveat as RSI: in trends, these levels alone are not sell/buy signals.
- %K / %D crossovers: When %K crosses above %D in the oversold zone (<20), this is a buy signal. When %K crosses below %D in the overbought zone (>80), this is a sell signal.
- Divergence: Same as RSI and MACD: when price and Stochastic disagree on the direction of momentum.
Stochastic vs RSI: When to Use Which
Both indicators measure momentum, but they ask slightly different questions. RSI looks at the speed of price change (gains vs losses). Stochastic looks at position within the range. In practice:
| Situation | Preferred | Why |
|---|---|---|
| Ranging market, quick reversals | Stochastic | Faster reaction, better for range trading |
| Trending market, divergence hunting | RSI | Less prone to whipsaws in trends |
| Using both | Redundant | They measure similar things. Pick one. |
Important: Never put RSI and Stochastic on the same chart and use both for signals. They're both momentum oscillators: they'll often agree and occasionally disagree without adding meaningful information. Choose one based on your trading style.
Common Stochastic Settings
The default "slow stochastic" settings are (14, 3, 3): 14-period %K, smoothed with a 3-period SMA to get the first %K shown, then a 3-period SMA of that for %D. This is what most charting platforms show by default.
Key Takeaways
- • Stochastic measures where the current close sits within the recent high-low range (0-100).
- • Above 80 = overbought zone, below 20 = oversold zone.
- • Two lines: %K (fast) and %D (slow, a smoothed version of %K).
- • Best in ranging markets. In strong trends, price can stay overbought/oversold for extended periods.