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Oscillators

Stochastic Oscillator

Shows where the latest close sits within the recent high–low range, from 0 (at the low) to 100 (at the high).

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The idea in plain words

In an uptrend, prices tend to close near the top of their recent range; in a downtrend, near the bottom. When closes start slipping away from the extremes, momentum is changing.

How it is calculated

%K compares the close with the lowest low and highest high of the last 5 candles, smoothed over 3 candles. %D is an average of %K.

raw = (close − lowest low) ÷ (highest high − lowest low) over 5 candles
%K = 100 × sum of (close − lowest low) over 3 ÷ sum of (highest high − lowest low) over 3
%D = SMA(%K, 3)

How to use it

  • Above 80: near the top of the range; below 20: near the bottom.
  • %K crossing %D from below 20: a possible buy; from above 80: a possible sell.
  • Best in sideways markets; in trends, use it to time entries in the trend direction.

Drawing conclusions

  • In strong trends the Stochastic can stay above 80 or below 20 for a long time.

Example

EURUSD trades in a range 1.0750–1.0850. Near 1.0755 the Stochastic dips to 12 and %K crosses above %D: the price rebounds towards the middle of the range.

Prices in examples are illustrative.

Watch out for

  • Many signals: use it with support and resistance, not on its own.

A little history

George Lane developed the Stochastic Oscillator in the 1950s.

Educational content only. No indicator or pattern predicts the future, and nothing here is investment advice.