The Stochastic Oscillator helps traders determine the momentum of an asset by analyzing its recent closing price relative to its high-low range. This is achieved by calculating two main values, %K and %D, and interpreting their interaction.

• %K Line:
  The %K line measures where the asset’s closing price falls within the specified high-low range. This is the faster, more responsive line of the two and can quickly indicate changes in momentum. When the %K line approaches the upper limit (near 100), it suggests a strong price position within the range, often a signal for potential overbought conditions. Conversely, when the %K line is closer to 0, it can signal oversold conditions.

• %D Line:
  The %D line is a smoothed version of the %K line, calculated as a 3-period moving average of %K. The %D line helps filter out noise and provides a slower signal to avoid false indications. It is often used in conjunction with %K line crossovers to identify potential buy or sell opportunities.

• Overbought and Oversold Levels:
  These thresholds help highlight potentially extreme conditions where reversals may occur. Readings above 80 indicate overbought conditions and may signal a price pullback, while readings below 20 suggest oversold conditions and could indicate a potential price rise.

In addition to overbought and oversold signals, traders often look for %K and %D crossovers as entry and exit points. Divergences between the Stochastic Oscillator and price action can also indicate potential trend reversals, with bullish divergences signaling a weakening downtrend and bearish divergences signaling a weakening uptrend.