The Stochastic Oscillator Trading Strategy Guide in IQ Option

Stochastic Oscillator Trading

When trying to establish the precise overbought and oversold positions, traders often use what is called The Stochastic Oscillator. Basically, it supplies investors with the information on entry or exit points. Introducing it in the 1950’s, George C. Lane is the father of this indicator that is also referred to as “Lane’s stochastics”.

How does the iqoption Oscillator indicator work?

As the author himself stated, The Stochastic Oscillator follows the speed or the momentum of the price, usually changing direction before the price, making it a really powerful tool for determining future price movements. This way, traders can get the valuable insight on trend reversal points that guarantees successful and precise predictions.

The term “stochastic” is used to point to a current price in relation to its price range over a period of time. When the trend goes upwards, chances are that the prices will be over the previous period’s closing price. On the other hand, when the trend heads downwards, prices go under the previous closing price.

During the uptrend the Stochastic Oscillator stays in the overbought position for a longer period

The indicator is made of four lines in total. Two lines moving horizontally, and two lines that represent moving averages (fast and slow). Horizontal lines represent both oversold and overbought levels (default setting at 20% and 80%). By using default settings, fast moving average line’s period equals 3, while the slow moving average line has a period of 13. The values can go from zero to 100.

When the moving average lines exceed the green line (80%), it means that the asset is overbought. Alternatively, when both moving average lines drop below the red line (20%), it means the asset is oversold. It is important to note that when the lines are in the oversold or overbought positions, it does not indicate the trend. Sometimes in the periods of strong uptrend, lines can remain in the overbought position for quite some time, and vice versa.

How to set up IqOption Stochastic Oscillator in IQ Option?

IQ Option platform makes it really simple to set up any indicator.

In the bottom left corner of your window, you should find and click on the “Indicators” icon. Choose the “Stochastic Indicator” from the list of indicators shown.

Setting up the IqOption Stochastic Oscillator indicator – Step one

You can select “Set up Apply” to change the parameters as you wish. Here you can modify %K and %D periods, overbought/oversold percentage, and lines appearance. If you are satisfied with the standard parameters, just click “Apply” to use the indicator with default settings.

Setting up the indicator – Step two

After finishing the set up and clicking apply, your indicator is ready for use. It will show itself at the bottom of the window, under the price chart.

Using the indicator in trading

By predicting price turning points and showcasing the overbought and oversold positions, this indicator gives traders valuable information on trend movement. Establishing trend movement can be obtained in multiple ways using Stochastic Oscillator, but the two we are about to show you stand out.

1. Overbought and oversold levels

Overbought Signal
When the both moving average lines go over the overbought horizontal line, chances are that the trend will start declining. The fast moving average going under the slow moving average is another sign of a future downtrend.

IqOption Intersection of the two moving average lines above the overbought line is a strong signal on the upcoming trend decline

Oversold Signal
On the contrary, when the moving average lines start sitting under the oversold line, it is likely that the trend will take an upwards direction. The fast moving average line going above the slow moving average line confirms the arrival of the bullish trend.

IqOption Intersection of the two moving average lines under the oversold line is a strong signal on the upcoming trend increase

2. Divergence

Trend reversal is usually followed after the indicator and the price action start moving in opposite directions. Divergence can go both ways.

IqOption Divergence as a harbinger of a trend reversal

Trading using Stochastic Oscillator and support/resistance

The overbought and oversold lines run horizontally and parallel to each other. The other two lines are the Period K (blue) and period D (red) lines.

Your objective when using this indicator is to look at the K and D lines behavior when they cross above or below the overbought or oversold lines. When the period D line cuts across the period K line from below while both lines are moving up above the oversold line, make a buy order.

If the period K line cuts across the period D line from above and goes below the period D line. Both lines are moving down under the overbought line, you should place a sell order.

Placing buy order on IQ Option

Place a buy order when the period K line crosses the period D line from under the oversold line.

If youre using support and resistance only you can make money trading the range. However, telling where the price will break the support and resistance can prove difficult. Thats why using the Stochastic Oscillator is so important.

The Japanese candlestick chart you use is also important. If youre trading 5 minute candles, your chart should be for a 30 minute or 1 hour time frame.

Placing a sell order on IQ Option

Place a buy order when the period K line crosses below the period D line. As both lines move down under the overbought line, these are signals to place a sell order on the IQ Option platform.

When to enter and exit trades is very important if you want to make money using the Stochastic Oscillator and support/resistance on IQ Option. Immediately the Stochastic lines cross the overbought or oversold lines, you can open longer positions. However, if they run within the period lines, your trades should be shorter.
 

IqOption Stochastic Oscillator Conclusion

The Stochastic Oscillator is a popular and widely used trading tool. It can work in combination with other momentum indicators and trend-following indicators as well. This combining alongside careful use is advisory for the most efficient results.