Definition
Stochastic Oscillator
The stochastic oscillator compares a closing price to its recent range to flag overbought and oversold conditions.
It plots two lines, %K and %D, on a 0-100 scale. Readings above 80 are considered overbought and below 20 oversold, and crossovers of the two lines generate buy or sell signals. The idea is that in an uptrend prices close near the highs, and in a downtrend near the lows.
Indian traders use the stochastic on Nifty, Bank Nifty, and stocks to time entries within a range and to spot divergence with price. In strong trends it can stay overbought or oversold for long stretches, so it works best in sideways markets or as a confirmation alongside trend tools.
Related terms
- ADXADX (Average Directional Index) measures the strength of a trend, regardless of its direction.
- DivergenceDivergence occurs when price and an indicator like RSI or MACD move in opposite directions, warning of a possible reversal.
- Support and ResistanceSupport is a price level where buying tends to halt a fall; resistance is a level where selling tends to cap a rise.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.