Stochastic Oscillator Trading: Master Overbought/Oversold Signals
The Stochastic oscillator measures momentum by comparing close to range. Learn to trade %K/%D crossovers, divergences, and overbought/oversold conditions.
- %K/%D crossover in overbought (>80) = sell signal. In oversold (<20) = buy signal. Works best in ranges.
- Divergence warns of reversal. In trends, stochastic can stay extreme—use trend filter.
- Thrive displays Stochastic with automatic crossover and divergence alerts.
Explore Stochastic Signals
Click through Stochastic signal types:
Stochastic in oversold territory (<20) with %K crossing above %D. Momentum turning up from extreme. Classic buy signal in ranging markets.
Signal
%K crosses above %D below 20
Buy when %K crosses %D in oversold zone. Works best in ranges or pullbacks in uptrends. In strong downtrends, oversold can stay oversold—use with trend filter.
What Is the Stochastic Oscillator?
The Stochastic measures where price closed relative to its range. %K shows where the current close is within the N-period high-low range. %D is a moving average of %K. The indicator oscillates between 0 and 100.
Close near the high of the range = high %K (overbought). Close near the low = low %K (oversold). This shows momentum—where buyers/sellers are winning.
Stochastic Signals
Oversold Bullish Cross
%K crosses above %D below 20. Momentum turning up from oversold. Classic buy signal. Works best in ranges or uptrend pullbacks.
Overbought Bearish Cross
%K crosses below %D above 80. Momentum turning down from overbought. Classic sell signal. Works best in ranges or downtrend rallies.
Divergence
Price and stochastic disagree. Price lower low + stoch higher low = bullish divergence. Price higher high + stoch lower high = bearish. Reversal warning.
| Signal | Stochastic | Zone | Action |
|---|---|---|---|
| Bullish Cross | %K > %D | < 20 | Look for longs |
| Bearish Cross | %K < %D | > 80 | Look for shorts |
| Centerline | Cross 50 | 50 | Trend bias |
| Divergence | Price vs Stoch | Any | Reversal warning |
Stochastic in Trends
Stochastic can stay overbought/oversold in trends. In strong uptrends, stochastic stays above 80. In strong downtrends, it stays below 20. Don't automatically fade these—respect the trend.
Trend Filter
- Use 50 level as trend filter
- Stoch > 50 = bullish bias, only take longs
- Stoch < 50 = bearish bias, only take shorts
- Or combine with higher timeframe trend
Common Mistakes
- Fading trends: Overbought in uptrend isn't automatic short. Respect trend.
- Crossover alone: Use with price action and context. Crossover isn't enough.
- Ignoring divergence: Divergence often precedes reversals. Don't ignore it.
- Low timeframes: Stochastic noisy on 1-minute. Use 15M+ for reliability.
Frequently Asked Questions
What is the Stochastic oscillator?
Momentum indicator comparing close to price range over N periods. %K = main line showing where close is in range. %D = 3-period smoothing of %K. Range 0-100.
What are overbought and oversold levels?
Above 80 = overbought (may fall). Below 20 = oversold (may rise). These are zones, not automatic signals. In trends, can stay overbought/oversold for extended periods.
How do I trade %K/%D crossovers?
%K crossing above %D = bullish signal, especially in oversold zone. %K crossing below %D = bearish signal, especially in overbought zone. Confirm with price action.
What is stochastic divergence?
Price makes new high/low but stochastic doesn't confirm. Bullish divergence: price lower low, stoch higher low. Bearish: price higher high, stoch lower high. Reversal warning.
Fast vs slow stochastic?
Fast stochastic is more sensitive (raw %K, 3-period %D). Slow stochastic is smoother (3-period %K, 3-period %D of that). Slow gives fewer false signals but is laggier.
What are the best stochastic settings?
14, 3, 3 is standard (14-period lookback, 3-period %K smoothing, 3-period %D). Shorter periods more sensitive. Test for your timeframe and asset.
Does stochastic work in trends?
Stochastic can stay overbought in uptrends, oversold in downtrends. Don't automatically fade overbought/oversold in trends. Use trend filter or centerline (50) for bias.
Stochastic vs RSI?
Both are momentum oscillators. Stochastic uses price position in range; RSI uses price change. Stochastic often faster/more volatile. Many traders use both for confirmation.