Stochastic Oscillator – Video Tutorial

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STOCHASTIC OSCILLATOR

Stochastic oscillator is one of the basic and popular trading indicators. It is a ‘momentum indicator’ which defines relative overbought and oversold price levels. It is simple to understand and very useful to combine with other trading indicators. Learn how to use Stochastic for binary options trading.

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Stochastic Indicator Explained

Stochastic oscillator is one of the widely used indicators for Binary Options Trading. As the name implies, stochastic oscillator is a curve which is oscillating between two levels – 0 and 100.

Stochastic is a momentum indicator which measures the divergence of a price in comparison to its price range over a predefined period of time. A ‘period’ number defining the stochastic curve (Example: stochastic period 14 or stochastic period 50 etc.) determines how many ‘candles’ in the past the stochastic indicator uses to calculate the price divergence. Measurement is calculated based on the asset’s high and low price during a given period of time, so this setting determines how fast the stochastic curve will oscillate between the levels of 0 and 100.

Download RealBinary Stochastic Strategy Alert MT4

RealBinary Stochastic Alert for Metatrader4 is a versatile indicator, which allows setting multiple types of alerts based on different rules and conditions of Stochastic Oscillator indicator. In addition it offers the possibility to set different types of fully customized alerts.

RealBinary Stochastic Strategy Alerter – Video Instructions

1. Signal Types Switches:

1.1. Down Signal Switch – Alerts the DOWN trade action.
1.2. Up Signal Switch – Alerts the UP trade action.

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2. Indicator Main Settings:

2.1. Stochastic %K Period Setting
2.2. Stochastic %D Period Setting
2.3. Stochastic Slowing Setting

3. Indicator Alert Types:

– Sound Alert
– Popup Alert
– Email Alert
– Call URL Alert
– SMS Alert

4. Indicators Alert Conditions:

– Stochastic Closes Above/Below predefined level.
– Stochastic Crosses Above/Below predefined Level.
– Stochastic Moves Up/Down.
– Stochastic Change is more than predefined level.
– Stochastic Main over Signal line crossovers.
– Stochastic movement patterns.

How to Use the Stochastic Indicator

The Stochastic oscillator is another technical indicator that helps traders determine where a trend might be ending.

The oscillator works on the following theory:

  1. During an uptrend, prices will remain equal to or above the previous period closing price.
  2. During a downtrend, prices will likely remain equal to or below the previous closing price.

This simple momentum oscillator was created by George Lane in the late 1950s.

Stochastics measures the momentum of price. If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price.

The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.

How to Trade Forex Using the Stochastic Indicator

The Stochastic tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100.

When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.

As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.

Looking at the currency chart above, you can see that the indicator has been showing overbought conditions for quite some time.

Based on this information, can you guess where the price might go?

If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.

Many forex traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be overbought or oversold.

Over time, you will learn to use the Stochastic to fit your own personal forex trading style.

How to Trade with Stochastic Oscillator

Using Slow Stochatics to Trade Talking Points:

  • Slow Stochastic provides clear signals in a forex strategy
  • Take only those signals from overbought or oversold levels
  • Filter forex signals so you are taking only those in the direction of the trend

Stochastic is a simple momentum oscillator developed by George C. Lane in the late 1950’s. Be ing a momentum oscillator, Stochastic can help determine when a currency pair is overbought or oversold . Since the oscillator is over 50 years old, it has stood the test of time , which is a large reason why m any traders use it to this day.

Though there are multiple variations of Stochastic, today we’ll focus solely on Slow Stochastic.

Slow stochastic is found at the bottom of your chart and is made up of two moving averages. These moving averages are bound between 0 and 10 0. The blue line is the %K line and the red line is the %D line. Since %D is a moving average of %K , the red line will also lag or trail the blue line.

Traders are constantly looking for ways to catch new trends that are developing. Therefore, momentum oscillators can provide clues when the market ’ s momentum is slowing down, which often precede s a shift in trend. As a result, a trader using stochastic can see these shifts in trend o n the ir chart.

Learn Forex: Slow Stochastic Entry Signals

(Created by Jeremy Wagner)

Momentum shifts directions when these two Stochastic lines cross . Therefore, a trader takes a signal in the direction of the cross when the blue line crosses the red line.

As you can see from the picture above, the short term trends were detected by Stochastic. However, traders are always looking for ways to improve signals so they can be strengthened. There are two ways we can filter these trades to improve the strength of signal.

1 – Look for Crossovers at Extreme Levels

Naturally, a trader won’t want to take every signal that appears. Some signals are stronger than others. The first filter we can apply to the oscillator is taking cross overs that occur at extreme levels.

Learn Forex: Filtering Stochastic Entry Signals

(Created by Jeremy Wagner)

Since the oscillator is bound between 0 and 100, overbought is considered above the 80 level. On the other hand, oversold is considered below the 20 level. Therefore, cross downs that occur above 80 would indicate a potential shifting trend lower from overbought levels.

Likewise, a cross up that occurs below 20 would indicate a potential shifting trend higher from oversold levels.

2 – Filter Trades on Higher Time Frame in Trend’s Direction

The second filter we can look to add is a trend filter. If we find a very strong uptrend, the Stochastic oscillator is likely to remain in overbought levels for an extended period of time giving many false sell signals.

We would not want to sell a strong uptrend since more pips are available in the direction of the trend. (see “ 2 Benefits of Trend Trading ”)

Therefore, if we find a strong uptrend, we need to look for a dip or correction to time a buy entry. That means waiting for an intraday chart to correct and show oversold readings.

At that point, if Stochastic crosses up from oversold lev els, then the selling pressure and momentum is likely alleviated . This provides us a signal to buy which is in alignment with the larger trend.

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