Stochastic Oscillator

The Stochastic Oscillator, developed by George Lane in the 1950s, is a momentum indicator that compares a security's closing price to its high-low range over a lookback period (typically 14 periods). The oscillator consists of two lines: %K (the fast line), which measures where the current close falls within the recent range, and %D (the slow line), which is a moving average of %K. Both lines oscillate between 0 and 100. Readings above 80 indicate overbought conditions, while readings below 20 indicate oversold conditions. The key insight behind the stochastic is that in uptrends, prices tend to close near the high of the range, and in downtrends, they tend to close near the low. Trading signals include: %K crossing above %D in the oversold zone (bullish), %K crossing below %D in the overbought zone (bearish), and divergences between the oscillator and price. There are two main versions: the fast stochastic (more sensitive) and the slow stochastic (smoothed, fewer false signals). The stochastic works best in range-bound markets and can generate false signals during strong trends.