Stochastic Oscillator
Master the Stochastic Oscillator - learn %K and %D lines, overbought/oversold zones, and crossover strategies.
What is the Stochastic Oscillator?
The Stochastic Oscillator was developed by George Lane in the 1950s. It compares the current closing price to the high-low range over a specified period, measuring momentum on a 0-100 scale.
The core principle: in uptrends, prices tend to close near the high; in downtrends, near the low.
%K = ((Close - Lowest Low) / (Highest High - Lowest Low)) × 100
%D = 3-period SMA of %K (signal line)
%D = 3-period SMA of %K (signal line)
How to Interpret
Key Levels
- Above 80: Overbought zone - potential selling opportunity
- Below 20: Oversold zone - potential buying opportunity
- 50 line: Equilibrium - above = bullish bias, below = bearish
Bullish Signals
- %K crosses above %D below 20
- Both lines rising from oversold
- Bullish divergence (price lower low, stoch higher low)
Bearish Signals
- %K crosses below %D above 80
- Both lines falling from overbought
- Bearish divergence (price higher high, stoch lower high)
GarudaAlgo Implementation
GarudaAlgo Enhancement
GarudaAlgo uses Stochastic as part of the momentum analysis, detecting %K/%D crossovers and divergence patterns automatically. We combine Stochastic signals with RSI for stronger confirmation.
Standard Settings
- %K Period: 14
- %D Period: 3
- Slowing: 3
Trading Strategies
Strategy 1: Overbought/Oversold Reversal
- Wait for Stochastic to enter overbought (>80) or oversold (<20)< /li>
- Watch for %K to cross %D in opposite direction
- Confirm with price action (reversal candle)
- Enter trade in direction of crossover
Strategy 2: Stochastic + Trend
- Identify overall trend using higher timeframe
- In uptrend: only take Stochastic buy signals from oversold
- In downtrend: only take sell signals from overbought
- Avoids counter-trend trades in strong trends