Stochastic Oscillator Indicator
For over 50 years traders from around the world use the Stochastic Oscillator indicator in stock trading, which has been long ago renamed «stoch». Today the indicator is referred to oscillators’ type and is supplied by many platforms for binary options trading, and for the time of its use it has generated a rather impressive amount of funds.
The popularity of the indicator is easily described. Indicator parameters are a subject for fine-tuning, which allows its use in a variety of trading methods. Stochastic Oscillator is firmly entrenched in many trading systems giving accurate entering signals or filtering binary options trades.
The most important parameters of the indicator are levels within its scale. 15-30 and 70-85 levels. In addition, the indicator will "wander" from the bottom to the top of the scale, and vice versa, giving signals of entering-exiting the trade from overbought – oversold levels, showing traders local and global price reversals.
If in general technical indicators give delayed signals, the Stochastic Oscillator is a champion of speed displaying all new trends as it signals among the first other indicators.
Here are the most often used indicator signals:
- when 2 Stochastic lines (main and supportive - %К and %D), after moving lower than the oversold level “20” turned around and started descending with breaking through the 20 level in the opposite up direction - it implies that there is a purchase signal on the market. Selling signals should be assessed at the reverse circumstances and indicator behavior.
- when the second %D line intersects the main one – signal %К line from the bottom up (preferably in the lower part of the indicator below the 50 level), traders search for the purchase opportunity. For selling the opposite indicator signals are assessed.
The strongest Stochastic Oscillator signal - a signal of divergence
Divergence is a variance between price and indicator following the price. In this case, when the price of the instrument on the chart shows us another high and the price indicator does follow on time and has almost no change in its value. Such places are called divergence. The explanation for this is the presence of a certain inertia in price action, which cannot be seen by an indicator because of its technical features.
At the same time, that places where the price and indicator values are different are the best and the strongest signals of Stochastic Oscillator indicator. At the same time, if it is a signal to buy, a divergence occurs, and if a signal to sell – convergence does.
To identify such places on the chart we need the Stochastic Oscillator indicator with its default settings in the Setup section (5,3,3), applied to the approximate prices - simple and hi - low prices.
In addition, we need to analyze the candlestick chart or bar chart. We will seek for divergence-convergence at the formed candles on the H4 timeframe.
Let us also note the fact that divergence and convergence appear both in the direction of the trend as well as against its movement. That is why it can be used both when trading trends and when trading the pullbacks.
For example in the above screenshot there is a bullish divergence marked, which arose on the pullback of the main trend. In this case the arrow marks the spot to sell an asset with binary options.
As you can see, our stochastic showed a fairly clear signal with a pretty clear entrance, with which we would receive a guaranteed profit.
The specifics of using Stochastic Oscillator in binary options trading
Stochastic Oscillator can be used for any financial asset. However, while using stochastic it is better to refrain from counter-trend strategies and trade only in the direction of the main trend.
It is better to choose longer timeframes to trade stochastic. It means that the most accurate signals will be given by this type of oscillator at timeframes from H1 to D1. Thus, Stochastic Oscillator is an indicator to be used with intraday, medium-term and long-term trading strategies. However, it is not very suitable for binary scalping since a smaller timeframe gives more false signals.