Developed by Dr. George Lane in the late 1950s, the Stochastic Oscillator is based on a fundamental observation: during an uptrend, closing prices tend to accumulate near the high of the recent price range. Conversely, in a downtrend, closes accumulate near the low. As momentum slows, closing prices begin to drift away from the extremes before a price reversal actually occurs.
What Is the Stochastic Oscillator?
Stochastics does not follow price or volume directly; it follows the speed and momentum of price closes relative to a defined high-low range over N periods. It oscillates bound between 0 and 100.
Calculating %K and %D
%K = [(Current Close − Lowest Low in N periods) ÷ (Highest High in N periods − Lowest Low in N periods)] × 100 %D = 3-period Simple Moving Average of %K Standard Settings (Fast): 5, 3, 3 Standard Settings (Slow/Smooth): 14, 3, 3 (Recommended for Forex)
Trading Stochastic Crossovers
The highest-probability crossover signal occurs when %K crosses %D inside the extreme zones. When %K falls below 20 (oversold) and then crosses above %D while both lines are turning up, it provides a strong bullish entry trigger. Conversely, a bearish crossover above 80 provides a short trigger.