Stochastic Oscillator

The Stochastic Oscillator measures where a stock's close sits within its recent high-low range, on a scale of 0 to 100. The idea is that in an uptrend prices tend to close near the top of the range, and in a downtrend near the bottom. It is plotted as two lines, %K and a smoothed %D, that swing between overbought and oversold extremes.

Traders read the stochastic a few main ways:

• Overbought and oversold: readings above 80 flag an overbought condition and below 20 an oversold one. As with any oscillator, extremes can persist in a strong trend.
• Line crossovers: %K crossing above the slower %D is a bullish trigger and crossing below a bearish one, especially near an extreme.
• Divergence: if price makes a new high but the stochastic does not, momentum may be weakening beneath the surface.
• Best in ranges: the stochastic shines in sideways markets and gives more false signals in strong trends, so blindly fading every extreme is a mistake.

Imagine a stock that has drifted sideways. Its stochastic falls below 20, then %K crosses back above %D while both turn up from the oversold zone. A range trader might read that combination as a sign the pullback is exhausting and buyers are returning.