How to use Stochastic Oscillator Indicator IQ Option

Identifying Oberbought and Oversold Levels While using Stochastic Oscillator

The Stochastic Oscillator is really a momentum-type indicator that determines overbought and oversold positions.

To put it differently, it offers the one with particulars on the time you should enter or leave the market industry. The indicator can be applied to predict future performance on the underlying asset. It was actually created and introduced by George C. Lane inside the 1950s.

The Stochastic Oscillator as demonstrated inside the IQ Option trading platform

How does it operate?

In line with Lane himself, the indicator “doesn’t follow price, it doesn’t follow volume or anything such as that. It follows the speed or maybe the momentum of price. Being a rule, the momentum changes direction before price. ” The indicator, therefore, is very effective at predicting trend reversal points, which is important for successful trading.

The Stochastic Oscillator returns the ratio connecting last closing price and also the high-low range during a group length of time. It is founded on the premise that through the uptrends, prices will just be above the previous period closing price. Alternatively, through the downtrends, prices will likely be below the previous closing price.

Through the uptrend the SO is probably going to book the overbought position for quite some time

The oscillator is made of two horizontal and two moving average lines (the fast and also the slow ones). The fast moving average line is actually default carries a period of 3, as you move the slow MA carries a period of 13. The oscillator ranges from 0 to 100. Oversold and overbought levels, in a natural way set at 20% and 80% respectively, coincide with two horizontal lines.

As soon as the fast and also the slow moving averages remain above the 80% level, the asset is held to be to become overbought.

When both lines remain beneath the 20% level, the asset is oversold. It has to be noted, however, that oversold readings are not really bullish, as securities can remain inside the oversold zone for quite some time without leaving it. Similarly, overbought reading won't always indicate an urge to open a “Put” position. Securities can remain overbought for relatively long periods of your energy during a robust uptrend.

How you can discovered?

Organising the Stochastic Oscillator indicator inside the IQ Option platform is straightforward.

Visit the “Indicators” button inside the bottom left corner on the screen. Then choose the Stochastic Oscillator due to collection possible indicators.

 

Organising the indicator. Step one

See a “Set up & Apply” tab and, if you wish to utilize indicator with standard parameters, simply visit the Apply button.

Organising the indicator. Step two

Or you could adjust the indicator within your liking, changing %K and %D periods, in addition to overbought and oversold levels for higher accuracy (alternatively, more signals).

The indicator will appear inside the bottom the main screen, right below the worth chart.

How to raise trading?

The indicator’s main purpose usually is to reveal the overbought and oversold levels and provide traders a touch on the time you should open a potentially profitable position. There are lots of ways to work out such cases while using help on the Stochastic Oscillator, of which listed here two are one of the trustworthy.

1. Overbought and oversold levels

Overbought Indication

When both slow and fast moving averages are above the overbought level the tendancy might be expected to start to be bearish. The fast MA crossing below the slow MA is surely an additional signal relevant to an upcoming downtrend.

Reversal on the SO moving average lines inside the overbought zone as being an indicator of any beginning downtrend

Oversold Indication

When both slow and fast moving averages are below the oversold level the tendancy might be expected to show bullish. The fast MA crossing above the slow MA might get a further signal relevant to an upcoming uptrend.

Reversal on the SO moving average lines inside the oversold zone as being an indicator of any beginning uptrend

2. Divergence

As soon as the indicator and the worth action start moving in several directions, it could be perceived being a signal relevant to an upcoming trend reversal. Divergences might be both bullish and bearish, at the same time.

Divergence being a harbinger of any trend reversal

Conclusion

The Stochastic Oscillator is surely an extremely useful and interesting technical analysis tool. For maximum efficiency, it could be combined along with momentum indicators and trend-following indicators. Caution could be needed when dealing with the indicator, as oversold and overbought level do not really correspond to the soon trend reversal.

Source : IQ Option best strategy