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Where is price relative to its recent range? A momentum indicator that spots potential reversals before they happen.
The Stochastic Oscillator measures where the current close is relative to the high-low range over a set period. It answers the question: "Is price closing near the top or bottom of its recent range?"
The theory: In uptrends, prices tend to close near the high of the range. In downtrends, they close near the low. When this pattern breaks down - when price is making new highs but closing near the low of the range - it suggests momentum is weakening.
Unlike RSI which measures speed of change, Stochastic focuses on price location within range. This makes it particularly useful for identifying potential reversals, especially in ranging markets.
Price is closing near the top of its range. Warning: Overbought doesn't mean "sell now" - strong trends stay overbought for extended periods. Look for %K crossing below %D as a signal.
Price is closing near the bottom of its range. Warning: Oversold doesn't mean "buy now" - downtrends stay oversold for extended periods. Look for %K crossing above %D as a signal.
Trading Signals ▲ Bullish %K Crosses Above %D in Oversold When %K crosses above %D below the 20 level, it's a bullish signal. Price is recovering from the bottom of its range. Strongest when combined with support levels.
When %K crosses below %D above the 80 level, it's a bearish signal. Price is rolling over from the top of its range. Strongest when combined with resistance levels.
Price makes a lower low but Stochastic makes a higher low. Momentum is improving despite lower prices. Often precedes bullish reversals.
Price makes a higher high but Stochastic makes a lower high. Momentum is weakening despite higher prices. Often precedes bearish reversals.
Stochastic works best in ranging markets. In strong trends, it pins to overbought or oversold and gives constant false signals. Always identify the market condition first — if it's trending, use RSI instead.
Indicators confirm what price action shows. They don't replace it. Never trade based on an indicator signal alone. Always combine with chart structure, pattern recognition, and volume analysis.
The Academy teaches when to use this indicator, when to ignore it, and how to combine it for high-probability setups.
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