Guide · Mean reversion
Does Stochastic 20/80 work?
Across 375 stocks, Stochastic 20/80 cut the worst fall on 90%, beat buying and holding on risk-adjusted return on 16% and on raw return on 13%. Mainly a seatbelt: it softened the big falls on most stocks, but usually gave up return to do it.
What it predicts
Where today's close sits in the last 14 days' range. Buy a %K/%D cross up in the oversold zone, sell a cross down in the overbought zone.
- In when %K crosses above %D while %D is below 20.
- Out when %K crosses below %D while %D is above 80.
Mean reversion plays bet that short, sharp moves tend to snap back. The family guide
How to use it
- It's right often (63% of calls), but check the size of the misses: a high hit rate can hide a few large losses.
- It sits in cash much of the time (holding on about 41% of days), so judge it on risk-adjusted return rather than on matching a rising market.
- It worked best on Micro caps (50% beat holding on risk-adjusted return) and worst on Big tech (0%).
- Use it as one input. Your signal combines the plays you count with the other factors you weight into one call.
When it worked
Stochastic 20/80 did best against holding in the 2008 crash (+14% median gap) and worst in the 2020–21 rally (−24%). Median gap in return against holding the same stock (per year over stretches longer than 18 months; crypto excluded).
| 2008 crash | Recovery 2009–19 | COVID drop | 2020–21 rally | 2022 bear | Since Oct 2022 | |
|---|---|---|---|---|---|---|
| Stochastic 20/80 | +14% | −9% | +7% | −24% | +9% | −7% |
Where it worked
By kind of stock: how often it beat holding on risk-adjusted return, and the median Sharpe ratio gap.
| Group | Beat holding, risk-adjusted | Sharpe gap |
|---|---|---|
| Micro caps | 50% | +0.00 |
| Media & telecom | 30% | -0.10 |
| Metals & mining | 29% | -0.12 |
| Consumer & retail | 24% | -0.14 |
| Healthcare | 22% | -0.17 |
| Industrials & materials | 20% | -0.18 |
| Real estate | 16% | -0.15 |
| Energy & power | 14% | -0.15 |
| Industrials & rentals | 11% | -0.28 |
| Semiconductors | 9% | -0.28 |
| Sectors | 8% | -0.19 |
| Financials | 4% | -0.25 |
| Software & devices | 3% | -0.23 |
| Indexes & ETFs | 0% | -0.21 |
| Big tech | 0% | -0.38 |
Where it helped most
Sharpe ratio gap against holding, stocks with 3+ years of history
Right now
Stochastic 20/80 holds 242 of 377 names as of the Oct 13, 2026 close.
Changed its call in the last two weeks:
Backtest results since 2005 (or as long as each stock has traded), against holding the same stock over the same dates, after 0.05% per switch. Past results don't promise future ones. This analysis does not constitute trading advice. Please meet with an advisor or independently review sources before making any decision.