The trend is your friend, so they say.
But what happens if instead of following a trend you trade on a trend reversal?
This is what pro traders count on to win continuously on IQ Option.
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Knowing when to trade and how to trade overbought and oversold levels in a market.
Why? Because this is where the gold mine lies. If you get it right, you can easily ride any trend, whether up or down, and gain more profits.
Who doesn’t want extra income? Virtually no one.
Today, I want to share with you how to trade profitably using a stochastic oscillator on IQ Option.
Matter of fact, this is the same tool trusted by most IQ Option traders to predict the future of any underlying instrument.
So, let’s get right to it.
What is a stochastic oscillator?
As per its name, this indicator doesn’t follow the price, volume, or anything else. It only responds to the momentum of the price and actually and shows when the price of a direction is about to change.
This fact alone makes the stochastic oscillator perfect for predicting future price movements.
How does stochastic work?
The stochastic oscillator follows the speed and momentum of prices. It also shows trend reversal points, therefore, presenting you with a rare opportunity to take a peek into where the prices might move next.
This is crucial for you as a trader.
You get insights on impending trend reversal points and therefore prepare plans on market entry and exit points.
The stochastic oscillator works on the premise that whenever there’s an uptrend, prices will be higher than the previous period closing price. On the other hand, during downtrends, prices will be lower than the previous closing price.
The oscillator is made up:
- Two lines running horizontally.
- Two lines representing moving averages measuring the fast and slow ones.
Technically, the fast-moving average is set at a period of 3. The slow-moving average measures a period of 13.
Additionally, the oscillator ranges from 0 and 100. Both of these lines are set at 20% and 80% by default respectively.
Interpretation of stochastic oscillator signals
- Whenever the fast and slow-moving averages remain above the 80% level, the instrument is said to be overbought.
- When the two lines fall under 20%, it indicates the overselling of the instrument.
Before I show you how to set up a stochastic oscillator in IQ Option, take note of the following crucial information.
A decrease in prices doesn’t always indicate a buy signal.
This is because in most cases, instruments can’t remain in the oversold zone for a longer period without leaving.
Likewise, the upward rally of prices doesn’t mean you should enter a buy position. Instruments can sometimes remain at an overbought level for long especially during a strong uptrend.
With that in mind, you are ready for the next step.
How to set up a stochastic oscillator on IQ Option.
As a side note, this indicator works best with Japanese candlestick charts. So make sure you are using them on your trading charts. Proceed.
- Login to your IQ Option account and locate the indicators feature on the bottom left corner.
- Click on the Popular tab and then choose Stochastic oscillator.
Here are the indicator’s settings you should use:
The %k line is for the period.
IQ Option puts it at 13 and in blue color. Remember the period can be anything from 13 days, years, months, etc.
The %d line represents a simple moving average of %k. It is orange in color.
As of the other two lines, they represent overbought (80) and oversold (20) and are green and red respectively.
How to trade on IQ Option using a stochastic oscillator.
1. Trading overbought and oversold levels on IQ Option.
Picking Buy signals with stochastic.
Whenever both the slow and fast-moving averages get below the 20 (oversold level), you should expect the trend to turn bullish.
As confirmation of this, wait for the fast-moving average to cross above the slow MA.
Picking Sell signals with Stochastic.
Sell when both the slow and fast MA go above 80 mark (overbought level). Your confirmation should come when fast MA crosses below the slow MA.
2. Trading divergence using a stochastic oscillator.
Commonly, divergence comes about when the price and the indicator move in different directions (diverge from each other).
This shouldn’t come as a surprise because a stochastic oscillator doesn’t follow the price.
How then should you interpret this?
Well, with divergence, comes support and resistance break on the trading chart. You should, therefore, expect the development of a new trend most likely in the opposite direction.
The stochastic oscillator is a very useful tool.
But as I always say on this site that no one tool is 100% perfect. You shouldn’t rely on a single indicator to make trading decisions. Luckily, IQ Option has a ton of indicators you can combine with a stochastic oscillator to deliver stellar results.
I suggest that you try this indicator with trend-following indicators or better yet, other momentum indicators. Try that with this free IQ Option demo account and see what happens.
Also Read: – How to Place Your First Trade On IQ Option.
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