Stochastic Oscillator a momentum indicator

BY Chris Andreou

|January 14, 2021

The Stochastic Oscillator compares where a price has closed relative to its price range over a given period.

  • Displayed as two lines
  • Main Line is called %K, and the second line is called %D and is a moving average of %K
  • Produces Buy and Sell signals as well as warning signals when a trend may be about to end

Theory behind the indicator is that prices tend to close near the upper end of a trading range during an uptrend.

  • As the trend matures, the tendency for prices to close away from the high of the session becomes more pronounced
  • In a downward move, the reverse would hold true
  • Ranges from 0% to 100%
  • Reading of 0% shows prices closed at lowest level during the preceding x-time periods.
  • 100% shows prices closed was the highest price during the preceding x-time periods.


  • “BUY” when %K, %D fall below 20 and then rise above 20.
  • “BUY” when %K rises above %D.
  • “Sell” when %K, %D rise above 80 and fall below 80.
  • “Sell” when %K, falls below %D.
  • Look for divergences
  • “BUY” when %K, %D fall below 20 and then rise above 20.
  • “BUY” when %K rises above %D.
  • “Sell” when %K, %D rise above 80 and fall below 80.
  • “Sell” when %K, falls below %D.


A Momentum indicator that attempts to measure the points in a rising or falling trend.

  1. Buy / Sell signals generated on crossovers
  2. Look for Divergences for signs of a trend reversal

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