Stochastics

The stochastic oscillator asks one narrow question: where did price close within its recent range? A reading near 100 means it closed near the top of that range, near 0 means near the bottom. The premise is that strength tends to close high and weakness tends to close low.

Fast and Slow

Two lines. %K is the raw calculation; %D is a short moving average of %K, used as the signal line. The fast stochastic plots them directly and is extremely jumpy. The slow stochastic smooths both, trading a little lag for far fewer false signals — which is why most traders use it.

Readings and Divergence

Above 80 is conventionally overbought, below 20 oversold. Crossovers of %K through %D inside those zones are the standard trigger. The more durable signal is divergence: price making a lower low while the oscillator makes a higher low says the selling is losing force even though price has not turned.

The Trap

Overbought does not mean sell. In a strong move the stochastic pins above 80 and stays there for the entire run, and every crossover looks like a top. This is the same failure mode as the Bollinger walk, and for the same underlying reason: range-based indicators assume a range exists.

On a penny stock with a catalyst, the recent range is obliterated in minutes and the oscillator saturates immediately. Use it for mean-reversion candidates — which is what our oversold scan screens for — and distrust it on anything already running.

What to Watch For

• Measures where price closed within its recent range, 0 to 100.
• Slow stochastic smooths the noise; most traders prefer it to fast.
• Divergence is more durable than a raw overbought or oversold reading.
• In a strong move the oscillator pins above 80 and stays there — overbought is not a sell.

Scans That Use This

• Oversold penny stocks
• MFI oversold penny stocks
• Penny stock RSI divergences

Technical Indicators

• Bollinger Bands
• Stochastics

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