Stochastic — Stochastic Oscillator
The stochastic oscillator measures the position of the close relative to the recent high/low range. Developed by George Lane in the 1950s, it stems from a simple observation: in an uptrend, closes happen near the highs; in a downtrend, near the lows. It bounds its reading between 0 and 100, like the RSI, but reasons on a different axis.
Definition and formula
The stochastic consists of two lines, %K (fast) and %D (slow):
%D = 3-period moving average of %K
The standard window is 14 periods for %K, smoothed over 3 periods for the "slow" version. The shorter the window, the more reactive but noisy the signal. The slow version (%K smoothed + %D) is used by default in Cash Scanner.
How to read the stochastic
Classic thresholds
- Stoch > 80 — overbought zone. The close is near recent highs. Short-term reversal risk, but in a strong uptrend this level can be sustained for weeks.
- Stoch < 20 — oversold zone. The close is near recent lows. Technical rebound likely in confluence with a support or divergence.
- Stoch between 20 and 80 — neutral zone. No extreme signal; watch the %K / %D crossover dynamics.
- %K crosses %D upward from < 20 — classic buy signal (oversold exit confirmed by smoothing).
- %K crosses %D downward from > 80 — classic sell signal (overbought exit).
Stochastic divergences
Like the RSI, the stochastic generates divergences with strong predictive power:
- Bullish divergence: new price lows but higher stochastic lows. Selling pressure loses intensity even as price continues lower.
- Bearish divergence: new price highs but lower stochastic highs. Buying pressure exhausts despite a new peak.
Cash Scanner detects these divergences automatically. See the divergences guide for the complete methodology across the 4 oscillators.
How Cash Scanner uses the stochastic
The stochastic enters the /100 score in several ways:
- Phoenix mode: oversold exit (Stoch < 20 then %K crossing %D upward) boosts the score — the classic signature of an early technical rebound.
- Momentum mode: a stochastic > 80 sustained in an ADX > 25 trend doesn't penalize the score (strength confirmation); the threshold alone doesn't trigger a sell alert.
- Divergences confluence: stochastic divergence counts as one of the 4 confluence signals (RSI, MACD, Stochastic, Williams %R). The "confluence ≥3" badge is a strong entry signal.
Limits and common pitfalls
- Stochastic noisy in tight range: on low-volatility or tight-consolidation assets, the indicator oscillates between extremes without predictive value. Always cross-reference with ADX (trend strength).
- Overbought is not sell: a stock in a strong trend can stay > 80 for weeks. Selling solely on Stoch > 80 is one of the most costly beginner mistakes.
- "Fast" vs "slow" stochastic: the fast version generates too many signals, the slow version is more reliable but lagging. Cash Scanner uses the slow version by default.
- Spurious %K / %D crossovers: in the neutral zone (20-80), repeated crossovers are noise. The "crossover from extreme" filter drastically reduces false signals.