Stochastic Oscillator
Catching reversals at overbought and oversold extremes
Definition
The Stochastic Oscillator is a momentum indicator that compares a closing price to its price range over a specified period (typically 14 days). It produces two lines: %K (the main line) and %D (the signal line, a moving average of %K). Values range from 0 to 100. Readings above 80 indicate overbought conditions; readings below 20 indicate oversold. Traders look for crossovers of %K and %D for buy/sell signals, especially when in overbought or oversold territory.
Formula / Rules
%K = (Close − Lowest Low) ÷ (Highest High − Lowest Low) × 100
Example
SPX has been trading in a range of 4,800–5,000 for 14 days. Today it closes at 4,980. The Stochastic %K = (4,980 − 4,800) ÷ (5,000 − 4,800) × 100 = 90. This reading above 80 signals overbought conditions. When %K subsequently crosses below %D at overbought levels, many traders interpret this as a sell signal.
Related Terms
Frequently Asked Question
What is the Stochastic Oscillator?
The Stochastic Oscillator compares current price to its range over 14 periods. Above 80 = overbought, below 20 = oversold. Traders use %K/%D crossovers in these zones as reversal signals.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.