What Is the Stochastic Oscillator?

The stochastic oscillator is a momentum indicator. It compares a stock’s closing price to its recent trading range—usually over the last 14 sessions. The output is plotted on a scale from 0 to 100.

That number tells you where price is within the recent high-low range. Higher readings mean the close is near the top of the range. Lower readings? Near the bottom.

It’s not trying to predict price. It’s measuring how fast it’s moving. And when momentum shifts before price does, that’s your edge.

The Core Formula

Here’s what’s under the hood:

%K = [(C – L14) / (H14 – L14)] × 100

Where:

• C = Most recent closing price
• L14 = Lowest low over the last 14 sessions
• H14 = Highest high over the last 14 sessions

That’s your fast stochastic. Now smooth it out:

%D = 3-day simple moving average of %K

This gives you the slow stochastic, which traders tend to rely on more for signals.

Reading the Indicator

The oscillator lives between 0 and 100.

• Above 80: Overbought territory
• Below 20: Oversold territory

But those numbers aren’t automatic trade signals. Strong trends can stay pinned in those zones longer than your patience.

What actually matters:

• Crossovers: When %K crosses %D from below 20 → potential buy signal
• When %K crosses %D from above 80 → potential sell signal
• Divergences: If price hits a new high or low but the oscillator doesn’t? That’s a clue momentum is fading.

In short, traders use the stochastic to spot potential reversals before they show up in price.

Fast vs. Slow Stochastic

Quick breakdown:

Version	%K Smoothing	Usage
Fast	None (or 1)	More sensitive, more noise
Slow	Smoothing = 3	Cleaner signals, less noise

Most use the slow version. It’s less twitchy.

A Real-World Example

Let’s say:

• 14-day high = $150
• 14-day low = $125
• Current close = $145

Then:

%K = [(145 – 125) / (150 – 125)] × 100 = 80

That 80 means price is near the top of its range—potentially overbought. But you wouldn’t short on that alone. You’d watch for a crossover or divergence first.

Stochastic vs. RSI: Which to Use?

Both are momentum tools. Both go from 0 to 100. But they’re built different.

Metric	RSI	Stochastic
Measures	Speed of price movement	Position of close in range
Best for	Trending markets	Sideways or range-bound moves

RSI reacts more to velocity. Stochastic reacts to consistency near highs or lows. Use accordingly.

When the Stochastic Misleads

Like any indicator, it’s not foolproof.

False signals happen—especially in volatile markets. A clean-looking crossover might whipsaw.

One way to filter? Trade only in the direction of the trend. If the broader trend is up, ignore bearish signals. Wait for the next bullish setup.

How Traders Actually Use It

• In range-bound markets: Buy at stochastic oversold + crossover. Sell at overbought + crossover.
• In trends: Only trade signals that align with the dominant trend.
• For divergence: Look for when price and oscillator disagree—that’s when reversals often spark.

Bottom Line

The stochastic oscillator isn’t magic. But it does one thing well: it shows when momentum might be rolling over—before price confirms it.

Used right, that’s an edge.