Stochastic oscillator

A bounded indicator, developed by George Lane, that measures position within a range rather than direction. The main line, conventionally called percent K, expresses the distance from the lowest low of the lookback to the latest close as a proportion of the whole range over that lookback. The signal line, percent D, is a short moving average of the main line. The fast, slow and full variants differ only in how much smoothing is applied to each, which is why the same instrument can look quite different under two of them.

Three conventions are read from it, and each is a convention rather than a rule. Readings near the top or the bottom of the scale are labelled overbought and oversold at thresholds an author chooses. A crossing of the main line and the signal line is treated as a change of short term momentum. And a divergence, where price makes a new extreme and the oscillator does not, is read as the move losing force. The commonly cited lookback comes from the indicator's original publication and has no property that makes it correct.

The trip follows from the bounding. Because the scale cannot exceed its ends, a persistent trend pins the oscillator at an extreme and keeps it there for as long as the trend runs, so the overbought label describes where the close sits inside a recent range and carries no statement about what happens next. Lane's own framing put more weight on divergence than on the level for this reason. Published tests of the indicator disagree with one another, and most of the disagreement is explained by different parameter choices rather than by different markets.