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Stochastic oscillator

An indicator showing where the close sits within the high-low range of the lookback period, on a scale from 0 to 100.

A stochastic oscillator under a price chartA price line above a lower panel with a fast and a slow curve swinging between a line at 80 and a line at 20, and the point where the fast curve turns up through the slow one circled.PRICESTOCHASTIC (14, 3)80overbought20oversold%K%D%K crosses above %D
The stochastic oscillator. The stochastic shows where each close sits inside the recent high-to-low range, on a scale of 0 to 100. Readings above 80 mean closes are hugging the top of that range and below 20 the bottom; the circle marks the fast line turning up through the slow one.

George Lane's construction, %K, measures the close relative to the highest high and lowest low of the last N bars. A second line, %D, is a short moving average of %K used as a signal-line. Readings above 80 are conventionally called overbought and below 20 oversold.

The underlying observation is reasonable: in an uptrend, closes cluster near the top of the range, and a shift toward closing near the lows can indicate fading strength.

In practice it saturates. During a strong trend it can sit above 80 for weeks, and every threshold-based short signal loses. It is far more defensible as a pullback timing tool within a trend you have already identified than as a standalone reversal indicator.

Related: slow-stochastic, stochastic-rsi, williams-percent-r, overbought, signal-line

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