Stochastics Oscillator in Binary Options
What is the Stochastic Indicator?
The Stochastics indicator is an oscillator indicator seen on many forex trading platforms, and it is used to measure primarily overbought and oversold conditions in the market.
It is an indicator that measures the strength of a trend. By showing when the asset is oversold or overbought, traders can then trade the trend reversals that will follow. This makes the Stochastics oscillator a very good tool to trade the binary options market with.
The Stochastics oscillator is not usually used in trading binary options as a stand-alone indicator. You have to combine it with other indicators, or use it as part of a strategy or with other indicators in order to produce signals that are accurate and non-ambiguous.
Stochastics in Binary Options: Using Stochs and Candlesticks
Stochastics detect conditions when the asset is overbought or oversold. An overbought asset registers Stochastics readings of >75 with the traditional settings of 10,3,3. With Stochastics readings of <25, the asset is considered oversold.
Oversold or overbought assets are assets that are about to bottom out or hit a market top respectively, marking points of reversal. These reversals can be further confirmed when there are candlestick patterns of the reversal variety. These include haramis, engulfing patterns, doji star patterns, etc.
When any of these appear in tandem with the appropriate Stochastics pattern, then the trader should trade the Call/Put option as follows:
a) Oversold Stochs + bullish reversal candlestick = CALL trade
b) Overbought Stochs + bearish reversal candlestick = PUT trade
The choice of how much time to set as the expiry time for the trade is left to the trader’s discretion. As a guide, the stronger the candlestick reversal, the more likely the move will last for some time.
Using the Stochastics in Strategies
The Stochastics oscillator is also used as a component of trading strategies such as those used in range trading the market. When the market is range-bound, it allows the asset to bounce between the upper and lower trend lines. The exact tradable bounces can be confirmed using the Stochastics oscillator. As such, the following trades can be taken with the Stochastics oscillator as a component of the range-bound trading strategy:
a) Retreat from the upper trend line (traced to cut across three recent price highs) PLUS Overbought Stochastics = PUT trade
b) Bounce from lower trend line (traced to cut across three recent lows) PLUS oversold Stochastics = CALL trade
The Touch/No Touch and Boundary trade types can also be traded using the range-bound setup described above. For the boundary trade, the trader can use the upper and lower trend line as the price boundaries for the In/Out trade and set the trades based on whether the asset will touch any one of these boundaries or simply stay within the range without touching any one of these boundaries. Different brokers will have different variants for the In/Out trade, but that offered by proprietary brokers like BOM offer very exciting prospects.
The Touch/No Touch trade can also be set using a price located close to, or at the trend lines. This would of course require that the price is either moving towards (TOUCH) or away from (NO TOUCH) the strike price used in setting either bet option.
There are other strategies that incorporate the Stochastics oscillator which can be used to pick out trading signals. It is left for traders to decide on which of the strategies that will suit their trading styles and profit targets. What works for one person may not necessarily work for the other. However the strategies do work when they are used properly.
The binary options trader is also encouraged to try different Stochastics settings and apply them to different setups on the chart. This was how yours truly was able to devise a trading system which actually works for long term trading. There is no limit to what is possible when working with momentum indicators such as the Stochastics oscillator.