How to Read the Stochastic Oscillator: %K, %D and the 80/20 Lines

What the stochastic measures: position within the range

The stochastic expresses, on a scale from 0 to 100, where the current close sits between the highest high and the lowest low of the last 14 bars. %K = (close − 14-bar lowest low) ÷ (14-bar highest high − 14-bar lowest low) × 100, and the highest high and lowest low are taken from the highs and lows of the 14 bars including the current one. For example, if the 14-bar high is 110, the low is 90 and the close is 105, %K is 75. A value of 100 means the bar closed at the 14-bar high, and 0 means it closed at the 14-bar low.

%K and %D, fast and slow

%D is a 3-bar simple average of %K. Using the formula above as it is gives the fast stochastic; smoothing %K first with a 3-bar average gives the slow stochastic. In the slow version, the fast %D becomes the new %K, and a 3-bar average of that becomes %D. Settings are usually written as three numbers: (%K period, %K smoothing, %D smoothing). TradingView's default is (14, 1, 3), which is the fast version, and the figure in this article is calculated with (14, 3, 3), the slow version. Because the slow version averages one more time, it is less jagged than the fast one but moves about one bar later. If the values differ from chart to chart, the first thing to check is whether these three numbers match.

• Fast %K: the formula as it is (smoothing 1)
• Fast %D = slow %K: a 3-bar average of %K
• Slow %D: a 3-bar average of slow %K

How it differs from RSI

Both run from 0 to 100, but they measure different things. RSI uses only closes to measure the ratio of recent gains to recent losses, and because of Wilder's smoothing, older moves linger a little (see the RSI article). The stochastic uses highs, lows and closes to measure position within the 14-bar range, and once 14 bars have passed, a bar's high and low drop out of the calculation completely. So on a bar where a large high leaves the window, the value can jump sharply even if the close has not moved, and it gets close to 0 or 100 more often than RSI does. On the same chart, RSI can be in the 60s while the stochastic is in the 90s.

The 80/20 lines and crossovers

By convention, above 80 is treated as the overbought zone and below 20 as the oversold zone. Some read a %K cross above or below %D as a sign that the move is changing, and many give more weight to such crosses when they occur above 80 or below 20. However, this course's measurements (on historical Binance bars) do not include the stochastic, so we cannot put a number here on how well these readings have worked. For RSI, an indicator of a similar kind, the share that rose after overbought bars was actually higher than the baseline (see the RSI article), but the calculation is different, so that result cannot simply be carried over to the stochastic.

How it looks in a range and in a trend

While price moves up and down within a range, the stochastic swings regularly between around 20 and around 80, and %K/%D crosses appear near the top and bottom of the range. But once price leaves the range and starts rising steadily, closes keep landing near the 14-bar high, so %K stays around 80 and above. In the rising part of the figure below, %K crossed below %D above 80 several times, yet each time price paused only briefly and then rose again. The same reference lines and crosses lead to completely different outcomes depending on the stretch.

Stochastic RSI: an indicator stacked on another

The Stochastic RSI applies the stochastic formula to RSI values instead of price. It expresses, from 0 to 100, where the current RSI sits between the highest and lowest RSI of the last 14 bars; TradingView's defaults are RSI 14, stochastic 14, %K smoothing 3 and %D smoothing 3. If the RSI has stayed between 45 and 55 over the last 14 bars, an RSI move from 45 to 55 is enough on its own to take the unsmoothed value from 0 to 100. Because it is that sensitive, it hits 0 and 100 often and gets labeled overbought or oversold far more frequently.

What this article does not say

The stochastic is a number that summarizes the close's position within the range of the last 14 bars; it does not calculate anything outside that range, or the direction ahead. Changing the period and smoothing values greatly changes how often it crosses the reference lines and when crosses occur, so this article makes no judgment about which setting is better. This site's RSI Radar and Pro Trading Chart show RSI, not the stochastic. Putting them side by side with another chart that displays the stochastic lets you see how the two indicators summarize the same stretch differently. The pitfalls of testing settings on historical data are covered in the article on backtesting.