Stochastic oscillator (and Stoch RSI)

What it is

The stochastic oscillator, credited to George Lane in the 1950s, compares the close with the range of the last N bars (usually 14): %K = (close − lowest low) ÷ (highest high − lowest low) × 100. %D is a 3-period average of %K. The 'slow' version smooths %K once more, and is what most platforms show by default.

Above 80 is read as overbought, below 20 as oversold. Stoch RSI applies the same formula to RSI values instead of price, which makes it faster and much noisier.

How to spot it

• %K crossing %D, especially above 80 or below 20.
• Divergence: price makes a new high, the stochastic doesn't.

How to use it

• In a range, look for shorts when it turns down from above 80 and longs when it turns up from below 20.
• In a trend, use oversold readings only for entries in the trend's direction.

Common mistakes

• Shorting every overbought reading in a strong uptrend; it can stay above 80 for a long time.
• Using Stoch RSI as if it were a calmer signal; it's the opposite.

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