- 1 What is the Stochastic oscillator?
- 2 The Double Stochastic strategy with its trading signals
- 3 Summary
- 4 GENERAL RISK WARNING
Today we want to introduce you to the Double Stochastic strategy, an interesting method of trading using a popular oscillator. The foundation for trading is opening long or short transactions. This is not that complicated. But to win some profits, you have to know when exactly to open this or that position. Here trading signals appear useful. Still, they can be false sometimes. So it is very important not to overdo with their quantity and choose wisely.
Oscillators are a group of indicators that show visually the movements of the market. The price is constantly fluctuating. Sometimes the moves are small, sometimes big. They resemble the waves in the ocean. They fall and rise continually. Oscillators are measuring the market waves and as such are quite good tools that may assist in deciding when to open trading transactions.
What is the Stochastic oscillator?
The Stochastic oscillator is one of the oldest indicators. It will help you catch the wave by conducting a comparison between the most recent closing price and the past high-low range over a specific time.
Two lines are forming the Stochastic oscillator. The first one is known as %K and the second one %D. Their range falls between 0 and 100. On the chart, however, you will observe two lines with 20 and 80 values. You will be able to identify the oversold and overbought zones with them.
What is the formula for calculating the Stochastic Oscillator?
The indicator is calculated according to the following Stochastic Oscillator formula:
%K = [(Close – Low N) / (High N – Low N)] / 100,
%D = simple moving average of %K in 3 periods.
The most recent closing price is called “Close” in the above formula.
Low N represents the lowest price that was observed over N periods.
High N is the highest price measured over the same interval.
The parameters of the indicator
When you choose an indicator from a list provided by IQ Option, it appears with the default settings. They are %K = 13, %D = 3, m = 3 bars. If this is not what you need for a financial instrument you have chosen or a specific strategy, you can decide to adjust them accordingly.
The %K period tells how many periods are taken into account when estimating the blue line of the indicator. It will be smoother when you increase the period. It will be the right option for traders who prefer long-term transactions. Those who would rather open short-term positions should set a smaller period. The line will bounce higher and produce trading signals more often. Nevertheless, some may turn out to be false.
The most commonly used periods for the %D line is between 3 and 9 bars. This value gives you information about how many periods are used for the %K simple moving average. The bounces are smaller when the period is set for higher values. When a small period is set, the effect may not be sufficient.
How to use the Stochastic oscillator on the IQ Option platform
The points of interest are the points when two lines of the Stochastic intersect. When it happens over the line with a value of 80, it gives the signal the uptrend comes to an end and the downtrend should soon begin. When the lines intersect below the line with value 20, that is in the oversold area, the uptrend is imminent.
So you can use the Stochastic to forecast the trend reversal. However, the signals can sometimes be not too precise. But the good news is that you can improve the accuracy by adding yet another Stochastic to your chart.
The Double Stochastic strategy with its trading signals
To use the method I am describing today, you will have to add two Stochastic oscillators to your trading platform. One is usually called “Fast”, and the second Stochastic is called “Slow”. Adjust the parameters of oscillators. The settings for the first one are 8, 3, and 5. The settings for the second one are 17, 3, and 7.
The first Stochastic, a fast one, will produce signals to open transactions. You will however not enter yet. You will watch the second Stochastic waiting for the confirmation of the entry points. This will save you from opening transactions too early.
Bear in mind that we present this method as a 5 minute Stochastic strategy, but in fact, you can also try it on other chart time frames.
What is the best stochastic setting for day trading?
We really like questions like this. You have surely noticed that today's strategy uses settings that are not the default for the Stochastic Oscillator. In general, the default settings are good enough. But different strategies may need to adjust the parameters for a particular method. Here we have overlaid 2 Stochastic Oscillators on different settings. This is the idea behind this method, to define the moment of entry into a trade two-dimensionally.
Opening long transactions with the Double Stochastic strategy on IQ Option
Below you will find an exemplary chart for the EURUSD with 5-minute Japanese candlesticks. Two lines of the Fast Stochastic cross in the oversold zone. This gives you a signal the reversal of the trend is close. But you do not enter the transaction yet. Instead, you are watching the second Stochastic. Not long after, the lines of the Slow Stochastic also intersect. This is the confirmation you were waiting for. Now is a good time to open a long position. You can keep it for a duration of 4 candles which is around 15-20 minutes. If you are using 15-minute candles, keep it open for an hour. With longer periods, lengthen the time your position is open accordingly.
Opening short transactions with the Double Stochastic strategy on IQ Option
This time I was using the chart for the USDJPY currency pair with 5-minute period candles. Notice when the lines of the first Stochastic cross each other in the overbought area. You are, however, waiting for the Slow Stochastic. You enter a short trade when the lines of the second Stochastic also cross in the overbought zone. Adjust the duration of your trade to the timeframe of your chart. With 5-minute period candles, I opened a transaction for around 15-20 minutes. With a 15-minute chart, my trade could continue for 1 hour and with 1-hour candles for around 4 hours.
|Fast Stochastic Settings||Slow Stochastic Settings|
|%K: 8, %D: 3, m: 5 bars||%K: 17, %D: 3, m: 7 bars|
|Generates initial trading signals||Provides confirmation for entry points|
The indicator I have presented today is the oldest oscillator ever developed. Still, it is a very popular one. It helps to forecast the change in the trend by identifying the oversold and overbought zones. Nonetheless, the Stochastic is not perfect. So the traders have come up with a method that combines two Stochastic oscillators. Thanks to this trick the accuracy of signals increases significantly.
Try the Double Stochastic strategy for yourself. Use the IQ Option practice account. You have the unique opportunity to conduct risk-free transactions there so you can train your skills in using today's strategy.
Tell us how you find the Double Stochastic strategy. There is a comments section down below the site.
GENERAL RISK WARNING
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