Glossary term
Stochastic Oscillator
George Lane's momentum oscillator: %K measures where the current close sits within the recent high-low range (default 14 periods), and %D is a 3-period average of %K that smooths it into a signal line. Readings above 80 are read as overbought, below 20 as oversold; crossovers and divergence are the standard triggers.
Definition & Construction (14, 3, 3)
The Stochastic Oscillator, developed by George Lane, measures a close's position within its own recent trading range rather than its absolute momentum. %K is calculated as (close − lowest low) / (highest high − lowest low) over a lookback window, canonically 14 periods, scaled to 0–100: a reading of 90 means the close sits near the top of its 14-bar range, a reading of 10 near the bottom. %D is a moving average of %K, typically over 3 periods, plotted alongside %K as a smoother signal line. The "14, 3, 3" notation on Closelook's terminals refers to the 14-period lookback, the 3-period %K smoothing and the 3-period %D — the standard slow-stochastic configuration used on most platforms.
Overbought/Oversold, Crossovers & Divergence
Above 80 is the conventional overbought zone, below 20 the oversold zone, with %K crossing above or below %D inside those zones read as the entry trigger. Divergence — price printing a new high while %K fails to confirm — carries more weight than the raw zone reading, similar to RSI divergence, because it flags waning momentum ahead of any actual reversal in price.
Why Overbought Can Stay Overbought
The oscillator's central failure mode is treating range position as a mean-reversion signal in a trending market. A stock in a strong uptrend can close near the top of its range for weeks, keeping %K pinned above 80 the entire time — "overbought" in that context describes trend strength, not exhaustion. Selling every overbought reading in a persistent trend is a documented way to fight the tape; the oscillator is most useful as a mean-reversion tool inside a range and needs a trend filter, such as MACD, before its zone readings are actionable on a trending instrument.