Stochastic Oscillator

The stochastic oscillator asks a location question. A reading near 100 means the close is near the top of the recent range. Near 0 means it is near the bottom. It does not compare gains with losses the way RSI does. George Lane's idea was that closes tend to cluster near the extreme as a trend runs, and to retreat from that extreme as it tires.

Fast %K is noisy. The slow version smooths it. Crosses of %K through %D near 20 or 80 are the textbook signals. In a trend, the oscillator pins at one end and the crosses against the trend fail. Use 80 and 20 as regime markers only when the market is ranging, or use the cross with the trend as a continuation.

A cross up from below 20, with price holding a low, is the bullish range signal. In an uptrend, a dip of stochastic toward 20 that turns up with the higher low is the continuation version.

A cross down from above 80, with price failing at a high, is the bearish range signal. Pinning above 80 is not bearish. It is what strong advances do.

Shorting 80 and buying 20 with no view of the trend. That is the classic stochastic loss. Also using it on a market with a tiny range, where the denominator is almost zero and the reading jumps.

The denominator is the range. A new breakout rewrites the high and the stochastic can stay extreme for as long as closes hug the new high. Extreme is not the same as "about to reverse."