Stochastic: where is price in its range?

Lesson 5/8~5 min
Preparing the chart…

The stochastic measures where the close sits between the recent highest and lowest price; below 20 and above 80 are extreme zones, and the two lines crossing is an early sign of a turn.

In the panel below the chart there are two lines: the grey line is %K, the orange line is %D. The stochastic asks one question: within the range between the lowest and highest price of the last 14 candles, where is today's close? If the close is at the top of the range the value approaches 100; at the bottom, it approaches 0. %D is a short average of %K and follows it a little more smoothly.

You will see two dashed lines in the panel: 20 and 80. Above 80, price is closing near the top of its recent range; below 20, near the bottom. Just like RSI, this does not mean ‘expensive’ or ‘cheap’; it only says where price stands compared with the recent past.

The stochastic is a faster indicator than RSI. That is both an advantage and a disadvantage: it catches turns earlier but raises false alarms more often. That is why the most common reading is a cross in an extreme zone: with the stochastic below 20, the grey line crossing the orange one upwards is an early sign that selling pressure is weakening.

Find the places on the chart where the lines cross below 20 and above 80, and look at what price did next. In strong trends the indicator stays in the extreme zone for a long time and the crosses come to nothing.

To avoid confusing RSI and the stochastic, think of it this way: RSI asks ‘are the rises or the falls stronger?’; the stochastic asks ‘where is today's close within the recent range?’. On the same chart the two can give different answers, and that does not mean one of them is ‘right’; they measure different things.

How to read it

  1. Look at the extreme zone: below 20 shows price closing near the bottom of its recent range, above 80 near the top.
  2. Look for crosses in the extreme zone: below 20, the grey line crossing the orange one upwards is more meaningful than a cross in the middle zone.
  3. Pick the direction that fits the trend: in an uptrend, upward crosses from below 20 are more reliable than downward crosses from above 80 in a downtrend.
  4. Do not use the stochastic as a trigger on its own; look for confirmation together with RSI or a support level.

In this state right now

Liquid symbols whose stochastic lines have crossed upwards on the daily chart while below 30.

Loading the live list…

Trap

The most common mistake is treating every extreme value of the stochastic as a turn. Because the indicator is fast, in a strong decline it dips below 20 and comes back out again and again, looking like a ‘bottom’ every time. Stochastic signals against the trend fail much more often than those in its direction. When you see a cross, check whether price also gives a sign: holding at a support, a higher low or a strong green candle.

Tip

The ‘Stochastic Bottom Reversal’ list in the screener finds symbols crossing upwards below 25. In the analysis of a symbol you pick from it, check the trend direction: turns in the same direction as the trend are the preferred candidates.

Glossary

%K
Where the close sits in the lowest–highest range of the last 14 candles (0–100).
%D
A short average of %K, used as a signal line.
Extreme zone
Below 20 and above 80 on the stochastic.

Mini quiz

  1. What does a stochastic of 90 tell you?
  2. Which stochastic cross is more meaningful?
  3. What is the downside of the stochastic being faster than RSI?

Try it now

See symbols whose stochastic turned up from the bottom →👑 Premium

For information only, not investment advice.