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Stochastic Oscillator, developed by George Lane, is a momentum oscillator that measures price momentum by comparing closing price to the price range over a period. It's based on the observation that in uptrends, closing prices tend to be near period highs; in downtrends, closing prices tend to be near period lows.
%K = 100 × [(C - L14) / (H14 - L14)] %D = 3-period SMA of %K Where: C = Most recent closing price L14 = Lowest low over 14 periods H14 = Highest high over 14 periods Standard parameters: (14, 3, 3) 14 = %K period 3 = %K smoothing 3 = %D period
Fast Stochastic: Uses raw %K values, more sensitive but noisier
Slow Stochastic: Smooths %K, reduces false signals
Full Stochastic: Customizable smoothing for both %K and %D
Stochastic RSI: Applies RSI to stochastic formula, combining advantages of both
Overbought Zone: %K or %D > 80 indicates overbought, possible pullback
Oversold Zone: %K or %D < 20 indicates oversold, possible bounce
Bullish Crossover: %K crosses above %D, generates buy signal, more reliable in oversold zone
Bearish Crossover: %K crosses below %D, generates sell signal, more reliable in overbought zone
Divergence: Price makes new high but stochastic doesn't (bearish divergence), or price makes new low but stochastic doesn't (bullish divergence)
Blunting: In strong trends, stochastic may remain in overbought or oversold zones for extended periods
Stochastic performs best in ranging markets, effectively identifying short-term overbought/oversold conditions. In trending markets, avoid simple counter-trend trades in extreme zones; wait for stochastic to return from extremes before entering with trend. Many traders combine stochastic with trend indicators, seeking stochastic signals only in trend direction.
Accurate identification of overbought/oversold conditions, provides clear trading signals, suitable for ranging markets, strong divergence prediction capability, adjustable parameters for different markets
Prone to false signals in strong trends, may remain blunted in extreme zones for extended periods, sensitive to price noise, requires combination with trend indicators
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