Compare closing price to its range to detect momentum shifts.
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Overview
The Stochastic Oscillator, developed by George Lane in the 1950s, measures the closing price relative to the high-low range over a specified period. The premise is that in uptrending markets, prices tend to close near the high of the range, and in downtrending markets near the low. Divergence from this pattern signals a potential reversal.
The indicator consists of two lines: %K (the raw oscillator = (Current Close β Lowest Low) Γ· (Highest High β Lowest Low) Γ 100) and %D (a 3-period SMA of %K, which acts as the signal line). Both oscillate between 0 and 100. Readings above 80 indicate overbought conditions; below 20 indicates oversold.
Trading signals include: %K crossing above %D from below in the oversold zone (bullish), %K crossing below %D from above in the overbought zone (bearish), and divergence between the oscillator and price. The "Stoch RSI" variant applies the stochastic formula to RSI values rather than price, making it even more sensitive for short-term trading.
Like RSI, the Stochastic works best in ranging markets and should be used with a trend filter in trending environments to avoid shorting strong uptrends or buying into strong downtrends.
Strategy Code
This is a TradingView Pine Script example for this indicator. Paste it into the TradingView Pine Editor, add it to your chart, and adjust inputs for your market and timeframe.
//@version=6
strategy("Stochastic Oscillator", overlay=true)
length = input.int(14, "Length")
smooth = input.int(3, "Smoothing")
k = ta.sma(ta.stoch(close, high, low, length), smooth)This is a thinkorswim ThinkScript example for this indicator. Open thinkorswim, create a custom study, paste the script, and apply it to your chart.
def k = StochasticFull()."FullK";
def d = StochasticFull()."FullD";
def buySignal = k crosses above d and k < 25;
def sellSignal = k crosses below d and k > 75;
AddOrder(OrderType.BUY_AUTO, buySignal, close, 1, Color.GREEN, Color.GREEN, "Stoch Buy");Join thousands of traders who use auto-Trading to execute this strategy automatically, 24/7.
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