GLOSSARY // Technical Analysis
Stochastic Oscillator
The stochastic oscillator locates the current close within the recent high-low range, on a 0-100 scale. The main line, %K, is (close - lowest low) / (highest high - lowest low) x 100 over 14 periods; %D is a 3-period moving average of %K that serves as the signal line. Readings above 80 are labeled overbought and below 20 oversold.
The logic differs from RSI: RSI measures the size of up moves versus down moves, while the stochastic asks only where price sits inside its range. Closes near the top of the range in an uptrend and near the bottom in a downtrend is normal behavior, so like every oscillator it generates its cleanest signals in rangebound markets and its worst ones in strong trends.
Standard signals are the %K/%D crossover in the extreme zones and divergences against price.
Over the last 14 sessions a stock's highest high is 55.00 and lowest low is 50.00. Today it closes at 54.00: %K = (54 - 50) / (55 - 50) x 100 = 80. Three days later price tags 55.20 but closes at 53.40, dropping %K to 65 while %D rolls over at 75. In the six-month range between 50 and 55, that crossover from the overbought zone has preceded fades back toward 51-52.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.