What it means
Stochastic oscillator measures momentum by comparing the closing price to the high-low range over a lookback period (default 14). Formula: %K = 100 × (Close - Lowest_Low) / (Highest_High - Lowest_Low). %D = 3-period SMA of %K. Scaled 0-100; readings above 80 = overbought, below 20 = oversold. Created by George Lane in the 1950s.
Why it matters
Stochastic captures momentum exhaustion — when price closes near the high of its recent range repeatedly, momentum is strong (high stochastic); when closes drift toward the lower end, momentum weakens. Especially useful for ranging markets where overbought/oversold matters; less reliable in strong trends where stochastic can stay overbought for extended periods.
How to use it
Use as a ranging-market filter. Buy oversold (<20) + bullish %K-%D cross; sell overbought (>80) + bearish cross. In trends, ignore overbought/oversold signals — focus on stochastic divergences (price makes new high but stochastic doesn't) as reversal signals.
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