Building the stochastic oscillator from close location

Locating the close inside the lookback

The construction premise is that closes cluster toward range lows while price is falling and toward range highs while price is rising. The same premise can be applied on monthly, weekly, or intraday bars.

The raw line percent K locates the current close between the highest high and lowest low of a lookback n that is commonly set to 5, then scales that ratio by 100. Percent K is that raw location reading, scaled to percent, of the current close between the lookback high and the lookback low.

Adding the companion line and the zones

The companion line percent D is a three-period summed form of the same close-versus-range numerator and denominator used for percent K. The oscillator is constructed as a 0-to-100 scale intended to mark overbought and oversold conditions.

When the two lines are plotted, the vertical axis is the oscillator percentage and the horizontal axis is time. Conventional zone boundaries sit at 80 and above for the overbought zone and at 20 and below for the oversold zone.

Crossing, divergence, and the slow form

A crossing of percent K through percent D is specified as a trend-change cue only when both lines have already entered the overbought zone or the oversold zone. That condition is the crossover rule.

A second specified cue is percent D divergence, which compares the price path with the path of percent D. It is presented as a possible reversal warning that can appear before the same turn is obvious on the price path.

A slow stochastic relabels percent D as slow percent K and defines slow percent D as a three-period moving average of that renamed line. Editorial note: the slow variant does not replace the original close-location step. It reuses the already summed companion as the new raw line and then averages that line.