A momentum indicator that compares a closing price to its price range over a look-back period to identify overbought and oversold conditions.
Developed by George Lane in the late 1950s, the Stochastic Oscillator consists of two lines - %K and %D - oscillating between 0 and 100. %K measures where the current close sits within the recent high-low range; %D is a 3-period moving average of %K that acts as a signal line.
Readings above 80 suggest overbought conditions; readings below 20 suggest oversold. The most reliable signal is the crossover of %K above %D in oversold territory (bullish) or below %D in overbought territory (bearish).
Like RSI, the Stochastic is most powerful when used to identify divergence: if price makes a lower low but Stochastic makes a higher low, bullish divergence suggests the downtrend is losing momentum.
The 'slow stochastic' - which smooths %K with an additional moving average - reduces noise and produces fewer, higher-quality signals compared to the default 'fast stochastic'. It is the more commonly used variant among retail traders.
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