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2002issue C021-2

Constructing a two-line stochastic from a range-normalized close

The latest close is scaled inside a chosen lookback high-low window and drawn as percent K. A short smoother becomes percent D, and three reading conventions follow from those two lines without turning the drawing into a trading plan.

  • Percent K locates the latest close inside the lookback high-low span and scales that location by 100.
  • Percent D smooths percent K, commonly over three periods, and is also stated as 100 times a three-period high-low ratio labeled H3/L3.
  • The two-line drawing supports three conventions: a threshold recross of the 20 or 80 band, a line cross of percent K through percent D, and a divergence when price and the oscillator split.
  • Successive readings can move erratically and generate false signals, so the oscillator is presented as better read alongside other indicators.
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Current trackStochastic oscillator170 readings

A close inside a lookback range

A stochastic oscillator locates the latest close inside the high-low span of a chosen lookback and scales that location by 100. That step is range normalization: the close is mapped onto a 0-100 scale by dividing its distance from the lookback low by the lookback high-low span.

Percent K is the primary line. It is the close minus the n-period lowest low, divided by the n-period high-low span, then multiplied by 100. The lookback is the n-period window that supplies the highest high and lowest low used in that ratio. The lookback n is suggested between 5 and 21 periods while remaining free to take any length.

A second line that smooths percent K

The construction is drawn as two series: a primary percent K line and a secondary percent D line that smooths percent K, commonly over three periods.

The percent D construction is stated as 100 times a three-period high-low ratio labeled H3/L3.

Three reading conventions

One interpretive convention treats a move of either line below 20 and then back above 20, or above 80 and then back below 80, as opposite threshold events. That pattern is a threshold recross: a reading that first leaves a fixed band such as 20 or 80 and then re-enters it.

A second convention treats a percent K cross through percent D from below or from above as opposite line-cross events. A line cross is an event in which the primary line moves through the smoother.

A third convention labels a price advance the oscillator does not confirm as a negative divergence, and a price decline the oscillator does not confirm as the opposite divergence. Divergence is a split in direction between price and the oscillator.

Two-line stochastic on Sprint FON, November 2000–April 2001

Percent K is the close scaled inside the lookback high-low window; percent D is the short smoother on that series. The 20 and 80 guides mark the band-reentry grammar, while the two lines themselves supply the cross grammar and the late-December price peak that the oscillator does not fully confirm. Points were read from the MetaStock pane in the source figure; the article prints no table of values.
Percent K is the close scaled inside the lookback high-low window; percent D is the short smoother on that series. The 20 and 80 guides mark the band-reentry grammar, while the two lines themselves supply the cross grammar and the late-December price peak that the oscillator does not fully confirm. Points were read from the MetaStock pane in the source figure; the article prints no table of values.Sprint FON GP · daily · 2000-11-02T00:00:00.000Z to 2001-04-19T00:00:00.000Z

The oscillator pane has no printed vertical scale. The two horizontal guides are the 20 and 80 levels named in the article and sit at the usual fifths of a 0–100 stochastic. Digitized readings are approximate to a few percent. Lookback n is not labeled on the figure; the article suggests 5–21 periods and a three-period percent D.

Why the oscillator is not read alone

Because successive readings can move erratically and generate false signals, the oscillator is presented as better read alongside other indicators. Editorial: the three conventions are treated here as grammars that fall out of the two-line design, not as entry or exit rules.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 42 in the Stochastic oscillator track
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