Stochastic Oscillator
Definition
The Stochastic Oscillator is a momentum indicator that shows where the latest close sits inside the high-to-low range of a recent lookback window, on a scale from 0 to 100.
Example
“XYZ dipped to the bottom of its morning range and the Stochastic crossed back above 20, so the trader bought one cent over the reversal candle.”
Detailed Explanation
The standard version uses 14 bars. A reading of 90 means price closed near the top of its 14-bar range; a reading of 10 means it closed near the bottom. The main line (%K) is usually smoothed, and a slower signal line (%D) is a moving average of %K. Readings above 80 are called overbought and readings below 20 oversold.
In a sideways market, range traders use the Stochastic as timing confirmation: a cross back up through 20 near support, or back down through 80 near resistance, shows the push into the edge has stalled. In a strong trend the indicator can stay pinned above 80 or below 20 for hours, so an extreme reading alone is not a reason to fade a move. Treat it as a timing tool inside a range you have already confirmed from price.
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