What Is Stochastic Oscillator?
The Stochastic Oscillator, developed by George Lane, measures where the current closing price sits relative to the high-low range over a specified lookback period (typically 14 candles). It produces two lines: %K (the fast line) and %D (a 3-period smoothed average of %K).
Values range from 0 to 100, with 80+ conventionally considered overbought and below 20 oversold. Unlike RSI, which measures the magnitude of price changes, Stochastic measures positional context — "how close to recent highs/lows is the current price."
Stochastic is most useful in range-bound markets where price oscillates between defined support and resistance. In strong trends, Stochastic stays pinned at the extremes for extended periods, producing constant false reversal signals. The crossover of %K above %D in oversold territory is the standard bullish signal; the reverse in overbought territory is bearish.
Related terms
- RSI (Relative Strength Index) — A momentum oscillator (0-100) measuring the speed and magnitude of recent price changes.
- MACD (Moving Average Convergence Divergence) — Trend-following momentum indicator showing the difference between two exponential moving averages.