How it is calculated.
%K = (close − lowest low) ÷ (highest high − lowest low) × 100 over a lookback, usually 14 periods. %D is a 3-period average of %K. The slow version smooths %K once more, which is where the common 14,3,3 setting comes from.
Reading the signals.
- Above 80 is overbought, below 20 is oversold — in a range. In a trend it can stay there for a long time.
- A %K cross of %D out of an extreme zone is the classic trigger.
- Divergence between price and stochastic warns that momentum is fading.
- Best results come from taking signals in the direction of the higher-timeframe trend.
Mistakes that cost evaluations.
- Shorting every overbought reading in a strong uptrend.
- Using it on very low timeframes where crosses happen constantly.
- Sizing up because two indicators agree — they are often built from the same data.
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