📈 Indicators·intermediate

Stochastic Oscillator

Also called: stoch, stochastics

A momentum indicator that compares the current close to its recent high-low range — used to spot overbought and oversold conditions.

Stochastics (typically the 14-period setting) measure where the current close sits within the recent high-low range. Readings above 80 are "overbought." Readings below 20 are "oversold." The indicator has two lines: the fast %K line and the slower %D signal line. Crossovers between the two are the trade signals. Stochastics work best in ranging markets where overbought and oversold conditions actually mean reversal. In trending markets, stochastics can stay overbought or oversold for days while price keeps trending — chasing those signals against a strong trend gets traders chopped up. The most useful application is divergence. When price makes a new high but stochastics make a lower high, momentum is fading even though price is still climbing. That's an early warning of reversal.

Real trade example

EUR/USD's daily chart printed a bullish stochastic divergence at 1.0445 in October 2023 — lower low in price, higher low in stochastic. The reversal led to a 700-pip rally over four months.

Related terms

RSI (Relative Strength Index)

intermediate

A momentum indicator from 0-100 that flags overbought (>70) and oversold (<30) conditions — and, more importantly, divergences.

MACD

intermediate

A momentum indicator that compares two moving averages to show trend direction, strength, and potential reversals.

Divergence

intermediate

When price moves in one direction but a momentum indicator moves in the opposite direction — a warning of trend exhaustion.

Williams %R

intermediate

A momentum oscillator similar to stochastics that measures overbought and oversold conditions on an inverted scale (-100 to 0).

Heiken Ashi

intermediate

A modified candlestick chart that smooths price action — uses an averaged open and close to filter noise and reveal trends.

Supertrend

intermediate

A trend-following indicator based on ATR that plots a single line above or below price — line below means uptrend, above means downtrend.

← Back to glossary Ask the desk a follow-up →