What Is Stochastic Oscillator?
The Stochastic Oscillator measures where the current closing price sits relative to the high-low range over a specified period (typically 14). It produces two lines: %K (the main line) and %D (a signal line, usually a 3-period SMA of %K). Both oscillate between 0 and 100, with readings above 80 considered overbought and below 20 considered oversold.
How Stochastic Oscillator Works
The formula: %K = 100 × (Close - Lowest Low) / (Highest High - Lowest Low). When the close is near the top of the range, %K approaches 100; near the bottom, it approaches 0. The crossover of %K above %D in oversold territory generates a buy signal; %K crossing below %D in overbought territory generates a sell signal.
Why It Matters for Traders
The Stochastic Oscillator excels in range-bound crypto markets where mean reversion dominates. It's less useful in strong trends, where it can stay overbought or oversold for extended periods. The slow stochastic (smoothed version) reduces false signals and is preferred for swing trading. Stochastic divergence from price is a powerful reversal signal, similar to RSI divergence.
