It is one of the most effective tools in predicting price trends. That’s how investors say about the Stochastic Oscillator indicator in technical analysis. So what is Stochastic indicator? How to use Stochastic divergence in transactions effectively? In today’s article, I will help you understand this.
Video on using Stochastic indicator in Binary Options trading
What is Stochastic Oscillator indicator?
Stochastic Oscillator (aka Stochastic) is a momentum indicator comparing closing prices with a specific price range in a certain period of time.
Momentum is a quantity that precedes prices. That’s why Stochastic always gives users signals with very high accuracy. This is also the biggest advantage of this indicator.
This indicator consists of 2 main elements
The 1st element is a fixed line:
- Upper line (green): Overbought zone (80).
- Lower line (red): Oversold zone (20).
The 2nd element is a movable line:
- Light blue line (%K): aka main line. It shows how the price reacts to the momentum.
- Red line (%D): aka Stochastic’s moving average.
How does Stochastic Oscillator work?
In most cases, this indicator is for predicting price trends. The basic operating principle of Stochastic is that when prices change, the momentum must change accordingly.
Method 1. Using Stochastic basic signals to verify price trends
The Stochastic Oscillator ranges from 0 to 100. It takes 80 and 20 zones as overbought and oversold zones respectively.
When the indicator points up, it goes from the oversold zone (20) to the overbought zone (80). At the same time, the blue line (%K) stays above the red line (%D). The price is in an uptrend.
When the Stochastic indicator points down, it goes from the overbought zone (80) to the oversold zone (20). At the same time, the blue line (%K) falls below the red line (%D). The price is in a downtrend.
Method 2. Use Stochastic divergence to predict the possibility of future price reversals
Stochastic divergence is a phenomenon in which an indicator reacts against price behavior.
Details as follows:
Stochastic bullish divergences appear when prices are in a downtrend. The price creates 2 troughs of which the following trough is lower (or equal) to the previous trough. However, Stochastic signals an uptrend. After this signal, there will be an increase in the price.
Stochastic bearish divergences appear when prices are in an uptrend. The price creates 2 peaks of which the following peak is higher (or equal) to the previous peak. However, Stochastic signals a downtrend. After this signal, there will be a decrease in the price.
How to trade with Stochastic Oscillator in details
The Stochastic Oscillator is a signal to predict price trends. So, the best way to use it in trading is in combination with specific signals to obtain correct entry points.
Combine with the Support/Resistance level
This combination relies on Support and Resistance as a specific price response.
Conditions: A 5-minute Japanese candlestick chart. The expiration time of 15 minutes (time for a transaction is 15 minutes).
+ Open an UP option as soon as the price bounces back higher when touching Support. At the same time, the Stochastic bullish divergence appears.
+ Open a DOWN option as soon as the price bounces back lower when touching Resistance. At the same time, the Stochastic bearish divergence appears.
Stochastic indicator combined with Heiken Ashi candlestick chart
The Heiken Ashi candlestick pattern is a special candlestick on the price chart. It very well suits for trendy trading. Therefore, when combined with the Stochastic indicator, it will give reliable entry points.
Conditions: The 5-minute Heiken Ashi candlestick chart. The expiration time of 15 minutes to 30 minutes.
+ Open an UP option when the Heiken Ashi candlesticks turn from red to green. At the same time, the Stochastic indicator points up and the blue line (%K) crosses the red line (%D) from below.
+ Open a DOWN option when the Heiken Ashi candlesticks turn from green to red. At the same time, the Stochastic indicator points down and the blue line (%K) crosses the red line from above.
A few notes when using the Stochastic indicator in binary options trading
- The Stochastic indicator is a trend prediction indicator. Therefore, do not use it as a confirmation signal. It is necessary to combine indicator signals with price action signals to get an accurate entry point.
- Limit the use of the Stochastic indicator for short-term reversal trading.
- When there are news impacts, the indicator’s signals will be less accurate. You should restrict trading at this time.
Finally, there are still many strategies to trade Binary Options on this site. However, you need to test them on your DEMO account for at least 2 weeks. This is how you check the exact probability of trading strategy using the Stochastic indicator.