Stochastic is a momentum oscillator that compares current closing prices to recent price ranges, oscillating between 0 and 100 to identify overbought and oversold conditions. Developed by George Lane, stochastic indicators include %K (fast) and %D (slow) lines, with readings above 80 indicating overbought conditions and below 20 suggesting oversold levels.

Stochastic analysis includes overbought/oversold signals, line crossovers, and divergences between price and indicator movements. The oscillator works best in ranging markets but can remain at extreme levels during strong trends. Understanding stochastic characteristics helps optimize timing for contrarian trading strategies and trend reversal identification.

Real-world example: EUR/USD shows stochastic readings at 15, indicating oversold conditions that often precede short-term bounces, prompting traders to look for buying opportunities or signs of trend reversal in the currency pair.