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EP11 Free trading lesson · Indicators

What Is Stochastic (STO)?
3 Ways to Find Trade Entries

Stochastic is an indicator that helps you find where price may pause or reverse. This lesson covers the 9/3/3 setting and finding entries with overbought/oversold, crossovers and divergence, with a real gold M5 trade example.

By 1TRADER6 min readUpdated 15 Oct 2026
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Warning: Trading carries a high level of risk. Indicator signals are not always right. This content is for education only.

Quick summary before you read

  • Stochastic (STO) compares the close with the high–low range of the last N candles and shows a value from 0 to 100, used to find where price may pause or reverse
  • This lesson uses 9/3/3 · blue line = %K · orange line = %D
  • 3 ways to find entries: overbought/oversold (above 80 / below 20) · crossovers (%K crosses %D) · divergence (price and STO move in opposite directions)
  • Plan on the higher timeframe first, then wait for an STO signal on M5 in the same direction as your plan

Previous lessons: EP1 Trends · EP2 Sideways markets · EP3 Trend reversals · EP4 Speed line · EP5 Demand & supply zones · EP6 FVG · EP7 Divergence · EP8 FIBO · EP9 Money management · EP10 Free backtesting

01Stochastic

What is Stochastic (STO)?

Stochastic (or STO) is a technical tool used in financial markets, both stocks and Forex, to help analyse price movement. STO compares the latest close with the highest and lowest prices over a set period.

The goal of Stochastic is to find where price may pause or reverse. It does not tell you price will definitely reverse, so always use it together with the higher-timeframe direction
%K=(Close − Lowest low)÷(Highest high − Lowest low)× 100

The high and low in the formula are the highest and lowest prices of the last N candles (this lesson uses 9), so the value is always between 0 and 100. If price closes near the high of the range, the value approaches 100; if it closes near the low, it approaches 0.

%K main line (blue)%D average of %K (orange)Above 80 overboughtBelow 20 oversold
02Settings

STO 9/3/3 settings

Traders set Stochastic differently (the common default is 14/3/3), but this lesson uses STO 9/3/3 to find entries, because it is fast enough for a small timeframe like M5.

TradingView

%K Length
9
%K Smoothing
3
%D Smoothing
3

MT4

%K period
9
%D period
3
Slowing
3 · Price field: Low/High · MA method: Simple
Stochastic (STO) 9/3/3 settings in TradingView (%K Length 9, %K Smoothing 3, %D Smoothing 3) and MT4 (%K period 9, %D period 3, Slowing 3)
STO 9/3/3 settings in TradingView and MT4 · tap to enlarge
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The field names differ but mean the same thing: %K Smoothing in TradingView = Slowing in MT4, and %D Smoothing = %D period.

03How to use

3 ways to use STO to find entries

You can use Stochastic to find entries in 3 ways. One signal alone is enough to enter, but when several signals appear together, the chance that price follows your plan is higher.

1. Entries with overbought / oversold

Above 80 · overbought

The market is in a phase where price is overbought and may pause or reverse down.

Below 20 · oversold

The market is in a phase where price is oversold and may pause or reverse up.

Stochastic above 80 is the overbought zone and below 20 is the oversold zone, where price may pause or reverse
Overbought (above 80) and oversold (below 20) zones · tap to enlarge

2. Entries with crossovers

Buy signal

%K (blue line) crosses %D (orange line) from below in the oversold zone

Sell signal

%K (blue line) crosses %D (orange line) from above in the overbought zone

Stochastic crossover signals: %K crosses below %D in the overbought zone (red circles) and above it in the oversold zone (blue circles)
Crossovers: red circles = cross down when overbought · blue circles = cross up when oversold · tap to enlarge

Some platforms show the %D line in red, so go by the line names in the settings window.

3. Entries with divergence

Divergence between price and Stochastic signals a possible change in price direction (the same idea as divergence in EP7, using STO instead of RSI).

BullishPrice makes a lower low but STO makes a higher low → selling pressure is fading, price may pause or reverse upBearishPrice makes a new high but STO does not → buying pressure is fading, price may pause or reverse down
Bullish divergence: price makes a lower low while Stochastic makes a higher low; bearish divergence: price makes a higher high while Stochastic does not make a new high
Bullish and bearish divergence with Stochastic · tap to enlarge
04M5 Example

Steps to use STO for M5 entries

2 steps
1
Plan on the higher timeframe first – analyse the chart to decide whether you will focus on BUY or SELL trades that day, and mark the zones to wait at, such as supply/demand zones
2
Drop to M5 and wait for an STO signal – when price reaches your zone, wait for an STO signal that matches your plan: a sell signal for a sell plan, a buy signal for a buy plan

Real example: gold sell plan, 26 Jun 2025

That day the gold plan was a sell plan, because H4 was in a downtrend, so any rise was treated as a pullback before the next leg down. The resistance to watch was the H1 supply zone (the orange zone at the top).

Sell zone 3346–3352SL 3375Target ~3270
Gold sell plan on 26 Jun 2025: H4 downtrend, waiting to sell around 3346–3352 at the H1 supply zone, SL 3375, target around 3270
Gold sell plan: sell around 3346–3352 at the H1 supply zone · tap to enlarge

Next, we waited for an STO signal on M5. Later that day price rose into the H1 supply zone and gave three STO sell signals at the same time.

Overbought+Crossovers+Divergence→SELL

So we sold right away (one signal is enough to enter, but this time there were 3, so the chance of a drop was high), and price fell as the sell plan expected.

Gold M5 chart: price rises into the H1 supply zone with 3 STO sell signals, overbought + crossover + divergence, then falls as planned
M5: STO overbought + crossover + divergence at the H1 supply zone · tap to enlarge
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In a strong trend, Stochastic can stay overbought or oversold for a long time. Don’t trade against the trend just because STO enters a zone. Only take signals on the side that matches your higher-timeframe plan, always set an SL, and size your lot with money management.

05Summary

Stochastic BUY / SELL signal summary

MethodBUY signalSELL signalWatch out
Overbought / OversoldSTO below 20STO above 80Strong trends can stay in the zone for a long time
Crossovers%K crosses above %D when oversold%K crosses below %D when overboughtCrosses mid-range (30–70) are weak signals
DivergencePrice lower low · STO higher lowPrice higher high · STO lower highSignals a possible pause or reversal, not a sure reversal
M5 stepsHigher-timeframe plan is BUYHigher-timeframe plan is SELLWait for price to reach your planned zone

The key to Stochastic is to use it to time entries, not to set direction. Plan from the trend and zones on the higher timeframe first, then wait for STO to signal on M5; several signals together carry more weight. Before using it live, backtest it for free with the same rules on enough trades.

06FAQ

FAQ about Stochastic

What is Stochastic (STO)?

Stochastic, or STO, is an oscillator that compares the latest close with the high–low range over a set period. It shows a value from 0 to 100 and is used to find where price may pause or reverse.

What Stochastic settings should you use?

Settings vary by trader. This lesson uses 9/3/3 to find entries: in TradingView set %K Length 9, %K Smoothing 3, %D Smoothing 3; in MT4 set %K period 9, %D period 3, Slowing 3.

What levels are overbought and oversold on Stochastic?

Stochastic above 80 is the overbought zone, where price may pause or reverse down. Below 20 is the oversold zone, where price may pause or reverse up.

How do you read Stochastic crossover signals?

When %K crosses %D from below in the oversold zone, it is a buy signal. When %K crosses %D from above in the overbought zone, it is a sell signal.

What is Stochastic divergence?

It is when price and Stochastic move in opposite directions. For example, price makes a new high but Stochastic does not (bearish divergence), showing that buying pressure is fading and price may pause or reverse down.

How do you use Stochastic to find entries on M5?

Plan on the higher timeframe first whether to focus on BUY or SELL that day, then drop to M5 and wait for an STO signal that matches the plan. For a sell plan, wait for overbought, a downward crossover or bearish divergence at your planned resistance.

Can you sell as soon as STO is overbought?

Don’t use it alone. In a strong trend, Stochastic can stay overbought or oversold for a long time. Trade in the higher-timeframe direction and wait for price to reach your planned zone; the more signals line up, the better the odds.

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Risk warning: Trading Forex, gold and CFDs carries a high level of risk and you may lose money. 1TRADER provides information and education to support your own decisions only. The trade examples in this article use historical data and do not guarantee future results. Read the full risk disclosure.