Stoch (14)
Momentum
The Stochastic Oscillator (George Lane): where does the price close today within the range of the last 14 days? Near the top or near the bottom?
In its original form this indicator uses volume and/or the daily range (High/Low). The scanner only has closing prices and approximates those inputs (see the note at the bottom). So treat the absolute values as indicative; the direction and the crossings remain usable.
Construction & calculation
- %K = the position of the closing price within the highest and lowest price of the last 14 bars, expressed from 0 to 100.
- %D = the 3-day average of %K (the smoothed signal line).
- In the scanner the daily range is approximated with the rolling max/min of the closing prices.
%K = 100 x (C - lowest(14)) / (highest(14) - lowest(14))
%D = SMA(%K, 3)
Interpretation
- Above 80 = the price consistently closes at the top of the range: overbought.
- Below 20 = the price closes at the bottom of the range: oversold.
- Lane himself put the most weight on divergence between %D and price, not on the absolute levels.
- The crossing of %K and %D within the extreme zone is a classic entry.
How the signal works in this scanner
Buy signal (green)Both %K and %D are at 20 or lower (both oversold).
Sell signal (red)Both %K and %D are at 80 or higher (both overbought).
Watch-outs & pitfalls
- In a strong trend the stochastic keeps 'sticking' in the extreme zone. That is not a reversal signal, that is trend strength.
- It is a pronounced range indicator: use it preferably when the ADX is low or the Choppiness Index is high.