What is the Stochastic Oscillator?

What is the Stochastic Oscillator?

The Stochastic Oscillator compares the current close to the range of prices over a set period. It oscillates between 0 and 100, highlighting overbought (>80) and oversold (<20) zones. George Lane designed it to show where price sits within its recent range, making it useful for spotting momentum shifts.

Stochastic Signals

• Overbought (>80): Price may reverse lower (sell signal)
• Oversold (<20): Price may reverse higher (buy signal)
• Bullish divergence: Price makes lower low, Stochastic makes higher low
• Bearish divergence: Price makes higher high, Stochastic makes lower high
• Crossovers: %K line crossing %D line generates signals

Trading Tips

Stochastic works best in ranging markets. In strong trends it can remain overbought or oversold for extended periods, so use trend filters or higher-time-frame bias to avoid fighting momentum. Adjust settings (e.g., 14,3,3) to balance sensitivity and noise.

Deep Dive

Most edges come from applying clear rules consistently. Expand your analysis beyond a single signal: add context from higher timeframes, recent volatility, session behavior, and catalysts. Define invalidation so a trade becomes obviously wrong fast, keeping losses small while letting winners compound.

Trader Checklist

• Higher‑timeframe bias aligns with the setup.
• Clear level or zone for entry with confluence.
• Pre‑defined stop beyond structure; 2–3R target.
• Session/liquidity supports follow‑through.
• No imminent high‑impact news unless planned.

Strategy Ideas

• Combine structure with momentum confirmation (break/close/acceptance).
• Use partials: scale out at first target; trail remainder.
• Journal results by session and pair to refine timing.

Risks and Limitations

• Thin liquidity widens spreads and distorts signals.
• False breaks around obvious levels—wait for acceptance.
• Overfitting indicators; keep the process simple and robust.

Example

Map bias on the daily chart, mark a zone, and wait on 1H for a close back above with rising participation. Enter on the retest; stop beyond the invalidation wick; target prior swing with room for extension. Record the outcome and context to iterate.