Stoch

Stoch, short for stochastic oscillator, is a momentum indicator used in technical analysis to compare a security's closing price to its price range over a specific period. Developed by George Lane in the 1950s, it helps identify potential turning points by measuring closing strength within a price range.

Calculation: The oscillator typically uses a look-back period n. The fast %K is calculated as %K = (Close - Lowest Low over n) / (Highest High over n - Lowest Low over n) × 100. A smoothed version yields %D, usually a 3-period simple moving average of %K. The slow stochastic further smooths %K before forming %D, reducing noise.

Interpretation: Readings range from 0 to 100. Values above 80 are commonly considered overbought, below 20 oversold, though the exact thresholds are not universal. Trading signals arise from crossovers of %K and %D (for example, %K crossing above %D in oversold territory), divergences between price and the oscillator, and rapid movements signaling a breakout. The indicator is most effective in range-bound markets; in trending markets it can produce false signals, with readings remaining repeatedly in overbought or oversold zones.

Variants and usage: The term Stochastic Oscillator can refer to fast, slow, or smoothed forms, with parameters adjusted for asset type and timeframe. Stochastics is often used in conjunction with other tools such as trend analysis, RSI, or volume to improve reliability.