Stochastic oscillator: where the close sits inside the recent range

What it measures

The Stochastic oscillator asks one question: where did this bar close inside the high-to-low range of the last N bars? A reading of 100 means it closed at the top of that range, and 0 means the bottom.

It is a position measure rather than a momentum measure, which is why it saturates in trends — a market making new highs closes near the top of its range every day.

That distinction explains most of the trouble people have with it. Momentum can fade while price still rises, and an oscillator built on momentum will show that. Position cannot: as long as each close lands near the top of the window, the reading stays pinned regardless of how tired the move is.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Find the highest high and the lowest low over the lookback period.

2. 2

   Express the close as a percentage of that range: (close − lowest) / (highest − lowest) × 100. This is raw %K.

3. 3

   Optionally smooth %K over a few bars — an unsmoothed %K is the "fast" variant and is extremely noisy.

4. 4

   Average %K over the %D period to get the signal line.

Settings

Fourteen with a three-period %D is the common default. Adding a three-period smoothing to %K converts the fast variant to the slow one and removes most of the noise that makes the fast version unusable.

How to read it

• Above 80 and below 20 are the conventional extremes, but in a trend the oscillator lives at one end and gives a continuous stream of losing counter-trend signals.
• The %K crossing %D is the standard trigger and is far more useful inside a range than inside a trend.
• Failure to reach the opposite extreme during a pullback is a sign the trend is intact.
• Read it with a trend filter or do not read it at all — this is the indicator most damaged by being used alone.
• The lookback window is a hard edge, so an old extreme dropping out of it can move the oscillator sharply with no new price action at all.

Where it misleads

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