What it means
%K shows where the close sits within the high-low range of the last n candles: %K = (close − lowest low) / (highest high − lowest low) × 100. %D is a short moving average of %K (usually 3).
Readings above 80 are called overbought, below 20 oversold.
Why traders use it
In a range, closes near the top of recent prices tend to precede pullbacks. In a trend, the stochastic can stay above 80 for a long time, so it is used with structure rather than alone.
Chart examples
Stochastic swings between 80 and 20
How to identify it objectively
- 1Common settings: 14, 3, 3 (this drawing uses 5, 3 to show swings).
- 2%K crossing below %D above 80: momentum turning down.
- 3%K crossing above %D below 20: momentum turning up.
- 4Use only in the direction of the trend or in ranges.
Bullish use
- 1Uptrend or range support.
- 2Stochastic dips below 20 and %K crosses above %D.
- 3Enter on a bullish close; stop below the swing low.
Bearish use
- 1Downtrend or range resistance.
- 2Stochastic rises above 80 and %K crosses below %D.
- 3Enter on a bearish close; stop above the swing high.
What confirms it
- The cross happens at a price level.
- Trend agrees.
What invalidates it
- Price keeps trending while the oscillator stays extreme.
How a hypothetical setup is built
Entry
On the bullish cross from below 20, confirmed by a price close.
Stop
Below the swing low.
Target
The range high or prior swing.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Technical IndicatorsADX, +DI and −DI
- Technical IndicatorsOn-Balance Volume (OBV)
- Candlestick PatternsDoji Candlesticks
- Full guide on The TradeskillRSI Explained
Historical testing
Not tested on The Tradeskill.
Limitations: when it fails
- Overbought can stay overbought.
- Many crosses in choppy markets.
- Settings change signals a lot.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.