The stochastic oscillator, developed by George Lane in the 1950s, measures momentum by asking where the current close sits within the high-to-low range of the look-back window. %K is the raw measure; %D is a simple moving average of %K used as the signal line. The canonical setting is 14, 3, 3 — 14-bar look-back, 3-bar SMA of %K to smooth it, then 3-bar SMA of %K to get %D.
Reads are similar to RSI: above 80 = overbought, below 20 = oversold. The classic signal is a %K / %D crossover near the extremes, plus divergence with price.
Unlike RSI, stochastic measures position-in-range rather than ratio-of-gains-to-losses, so the two oscillators behave differently in choppy markets — stochastic is faster and noisier.
Formula
%K = 100 · (C − L_N) / (H_N − L_N) %D = SMA(%K, 3)
Example
14-bar high = 110, low = 100, current close = 107. %K = 100 · (107 − 100) / (110 − 100) = 70. Trending high, not yet overbought.
How Noon Barbari uses Stochastic oscillator
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See the indicators reference →Related terms
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Momentum oscillator that ranges 0–100 based on the ratio of gains to losses.
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MACD
Trend-momentum hybrid: difference of two EMAs, plus a signal-line EMA and histogram.
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Moving average
A rolling average of price over a fixed window, used to smooth noise.
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Range
Sideways price action bounded by a definable support and resistance.