What it measures

The stochastic oscillator asks where the latest close sits inside the range of the last n bars: at the top, at the bottom, or in between. George Lane's observation was that closes cluster near the highs in an uptrend and near the lows in a downtrend, and that the clustering fades before the trend does.

The calculation

K = 100 × (close − lowest low of n bars) / (highest high of n bars − lowest low of n bars) D = simple moving average of K over 3 bars

The "fast" stochastic plots K and D as above; the "slow" version smooths K itself over 3 bars first and then takes D of that. TradingView's built-in uses a 14-bar range, K smoothing 1 and D smoothing 3.

Inputs and defaults

  • Length (K): 14.
  • K smoothing: 1 (fast) or 3 (slow).
  • D smoothing: 3.
  • Thresholds: 80 and 20.

How it is read

Above 80 the close is near the top of its range and is called overbought; below 20 oversold. The K line crossing the D line is the trigger most strategies use, often only when it happens beyond a threshold. Divergence against price is read as weakening momentum.

Where it fails

Like every bounded oscillator it pins in a trend: a strong uptrend keeps the close near the range top, the stochastic sits above 80, and every sell signal is early. It is also noisier than the RSI because it uses a single bar's close against a range rather than an average of changes, which is why most versions add smoothing and why the smoothing then becomes another parameter to tune.

How the desk reads it

In the screened universe the stochastic appears mostly in short-timeframe reversion rules, and those are the rules fees hurt most. The desk reads them after fees at a realistic taker rate before anything else.

In the desk's screen

Of the 614 screened strategies in the library, 28 (4.6%) use this indicator somewhere in their logic.

11 of those were gross-profitable on enough cells to reach the after-fee replay.

The count is read from the compiled code of each strategy in the library; a strategy that computes the indicator by hand under another name is not counted. The desk's own rules are not part of the count.