Stochastic Oscillator
A momentum indicator comparing the closing price to the range of prices over a specific period.
Plain English Explanation
The Stochastic tells you where the current price is relative to recent highs and lows. It's asking: "Where are we in the recent range?"
**Simple analogy:** Imagine a ball bouncing between floor (0) and ceiling (100). Stochastic tells you how close the ball is to the ceiling or floor.
**Reading the numbers (0-100):**
- **Above 80:** Price is near the top of its recent range (overbought)
- **Below 20:** Price is near the bottom of its recent range (oversold)
**The two lines:**
- **%K (Fast line):** The main signal
- **%D (Slow line):** Smoothed version for confirmation
**Key signals:**
- %K crosses above %D while oversold = Buy signal
- %K crosses below %D while overbought = Sell signal
- Bullish divergence = Price makes lower low, Stochastic makes higher low
How It Works (Technical)
Stochastic calculates where the current close is within the high-low range of the lookback period (typically 14). %K = ((Current Close - Lowest Low) / (Highest High - Lowest Low)) × 100. %D is usually a 3-period SMA of %K.
When It Works Best
- Range-bound markets
- Timing entries in trending markets (buy oversold in uptrend)
- Spotting momentum divergences
- Short-term trading and scalping
- Confirming reversal patterns
When It Fails
- Strong trending markets (stays extreme for long periods)
- Low volatility periods (gives weak signals)
- When used as the only indicator
- News and high-impact event trading
- Choppy intraday action
Common Beginner Mistakes
- 1Selling every overbought reading (deadly in uptrends)
- 2Buying every oversold reading (deadly in downtrends)
- 3Ignoring the trend direction
- 4Not waiting for the crossover confirmation
- 5Using default settings on all timeframes
Pro Tips
- In uptrends, focus on oversold signals (buy dips)
- In downtrends, focus on overbought signals (sell rallies)
- Watch for divergences - they're high probability
- Slow Stochastic (smoothed) gives fewer false signals
- Combine with support/resistance levels for best results
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