momentum indicator
Stochastic Oscillator (Stochastic)
The Stochastic Oscillator compares a security's closing price to its price range over a given period. It measures momentum and identifies overbought/oversold conditions, oscillating between 0 and 100.
Formula
%K = 100 × ((Close - LowestLow(N)) / (HighestHigh(N) - LowestLow(N))) %D = SMA(3) of %K where N = lookback period (default 14)
Common strategies
- Overbought/oversold: %K > 80 suggests overbought (sell), %K < 20 suggests oversold (buy).
- %K/%D crossover: %K crossing above %D in oversold territory is bullish; crossing below in overbought territory is bearish.
- Divergence: Price makes a lower low but Stochastic makes a higher low — bullish divergence signaling potential reversal.
How CommonQuant uses it
CommonQuant pre-calculates Stochastic(14, 3) on all timeframes. DSL strategies can reference stoch_k() and stoch_d() functions for %K and %D respectively.
Frequently asked questions
What is the difference between Stochastic and RSI?
Both are momentum oscillators (0-100), but Stochastic compares close to the price range, while RSI measures the ratio of gains to losses. Stochastic is more sensitive in ranging markets; RSI is better for trend strength.
What are fast vs slow Stochastic?
Fast Stochastic uses raw %K, which is very volatile. Slow Stochastic (the default) smooths %K with a 3-period SMA, producing fewer but more reliable signals.