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Locates the closing price relative to the recent high-low range, exposing whether buyers or sellers are in control by showing proximity to range extremes.
Stochastic %K measures where the current close sits relative to the high-low range over a set number of periods. Values above 80 suggest overbought conditions, below 20 suggest oversold.
Stochastic %K is a momentum oscillator that compares a security's closing price to its price range over a specified period, typically 14 days. Developed by George Lane, %K shows where the current close falls within the recent high-low range. The theory is that prices tend to close near highs in uptrends and near lows in downtrends, so %K helps identify momentum and potential reversals.
The %K calculation:
%K = ((Current Close - Lowest Low) / (Highest High - Lowest Low)) × 100 Where: Lowest Low = Lowest price over lookback period (14 days) Highest High = Highest price over lookback period (14 days)
Example:
14-day High: $55 14-day Low: $45 Current Close: $52 %K = (($52 - $45) / ($55 - $45)) × 100 = 70%
Interpreting %K levels:
- %K > 80: Overbought; price near top of recent range
- %K 50-80: Bullish momentum; price in upper half of range
- %K = 50: Neutral; price at midpoint of range
- %K 20-50: Bearish momentum; price in lower half of range
- %K < 20: Oversold; price near bottom of recent range
Why %K matters:
- Momentum indicator: Shows buying/selling pressure
- Range context: Places price within recent trading range
- Reversal signals: Extremes may indicate exhaustion
- Paired with %D: Crossovers generate trading signals
%K types:
- Fast %K: Raw calculation; very sensitive
- Slow %K: Smoothed version (3-period SMA of Fast %K)
Trading signals:
- %K crosses above %D: Bullish signal
- %K crosses below %D: Bearish signal
- Oversold cross up: Buy signal when %K crosses %D below 20
- Overbought cross down: Sell signal when %K crosses %D above 80
Limitations:
- Can stay extreme: Strong trends keep %K overbought/oversold
- False signals: Frequent crosses in choppy markets
- Lagging component: Smoothed versions delay signals
%K is most useful when combined with %D and used in conjunction with trend analysis. The Stochastic oscillator provides early momentum signals but requires context to avoid acting on false readings in trending markets.