What is the Stochastic Oscillator?

What is the Stochastic Oscillator?

The Stochastic Oscillator is a momentum indicator that compares a security's closing price to its price range over a specific period. It oscillates between 0 and 100, identifying overbought (>80) and oversold (<20) conditions. The indicator helps traders spot potential reversals.

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 stay overbought/oversold for extended periods. Combine with trend analysis to filter false signals.