Contents
A strategy that I will be writing about today, combines two indicators. This is the Stochastic Oscillator and the Parabolic SAR strategy. The IQ Option platform is a very good place to practice this strategy on digital options.
Key Takeaways🔑
| →The Stochastic Oscillator and Parabolic SAR strategy can help identify potential trade entry points. |
| →Parabolic SAR can be used as a dynamic stop loss level in addition to generating entry signals. |
| →Stochastic Oscillator helps predict market situations and identify oversold and overbought areas. |
| →Combining both indicators can provide more reliable trading signals, but thorough market analysis is necessary. |
| →Always practice with caution and proper risk management when using this strategy for trading. |
Parabolic SAR
There is a whole article about the Parabolic SAR on our website, thus I will not repeat myself. If this indicator is a stranger to you, I highly recommend reading the quoted article.
How to use Parabolic SAR effectively?
It is worth mentioning here that in addition to the Parabolic SAR strategy discussed today, the indicator itself can be used not only to generate position entry signals but also as a dynamic stop loss level. In order to use it effectively as SL, defensive orders should be moved to the price levels determined by the consecutive dots of the Parabolic SAR indicator.
Using Parabolic SAR as a standalone strategy can only work in periods of strong long-term trends. Therefore today we propose a Parabolic SAR strategy in which the Stochastic Oscillator gives us additional confirmation of the entry.
Stochastic Oscillator
The Stochastic oscillator is considered one of the oldest indicators. Dr George Lane invented it in 1950. Its task is to help in predicting the future situation on the market.
It consists of two lines that go between 0 and 100 values. You will see three lines on the chart with the value of 20, 50 and 80. 50 shows a middle, and 20 and 80 indicate oversold and overbought areas.
The Stochastic evaluates the asset’s closing price with its price range, low and high, over 14 candles. It is a momentum indicator which is calculated using the formula
%K = 100 (C – LowN )/(HighN– LowN)
One of the two lines is the %K line and is the fast Stochastic that follows the present market price of a pair of assets.
The second one is known as %D or the signal line, and it is the slow Stochastic that is the 3 period moving average.
N represents the current period used to calculate the oscillator. Normally, it is set for 14 periods.
C stands for the most recent closing price.
LowN or L14 is the minimum price that was measured during a given period N.
HighN is the maximum price during a given time.
The most interesting points are when the two lines of the indicator cross each other.
In case the %K cuts the %D line from below, and continues above it, the market gains faster than average and this is a sign the price will rise. This is a moment to buy.
In case the %K intersects the %D from above and moves below it, the market slows down and the price will fall. This is a signal to open a sell position.
I have mentioned that this indicator is used to determine the oversold and overbought areas. The asset is considered to be oversold when the value of the Stochastic drops below 20. When the value rises over 80, the asset is claimed to be overbought.
Another thing you should keep observing while trading with the Stochastic oscillator is its divergence. Divergence is the distance between the %K and the %D lines. When this space grows, the trend builds up. When the gap narrows, the trend most likely will soon reverse.
Configuring the Stochastic and the Parabolic SAR strategy on the IQ Option platform
Naturally, you will need the account on the IQ Option platform to perform trading. Once you are logged in, you will have to decide what asset you would like to trade and select the candlesticks type of the chart.
Now, click on the chart analysis icon and search for the two indicators of our interest in the list of popular indicators. Once you select them, they will appear on your chart.
Pros and Cons of the Stochastic Oscillator and Parabolic SAR Strategy👍👎
Pros:
- ✅ Can help identify potential trade entry points and dynamic stop loss levels
- ✅ Provides a comprehensive view of market situations with the use of two indicators
- ✅ Helps traders identify and capitalize on oversold and overbought market conditions
Cons:
- ❌ Requires a thorough understanding of both indicators to be used effectively
- ❌ May generate false signals during periods of low market volatility or sideways trends
- ❌ Not suitable for novice traders without a solid understanding of technical analysis
| Parabolic SAR | Stochastic Oscillator |
|---|---|
| Used for generating position entry signals and as a dynamic stop loss level | Helps predict market situations and identify oversold and overbought areas |
| Dots appear above or below candlesticks to indicate trend direction | Consists of two lines (%K and %D) that move between 0 and 100 values |
| Works best during strong long-term trends | Indicator crossovers are used to generate buy and sell signals |
Using the Stochastic and the Parabolic SAR strategy for CALL options
Look at the picture below. The Stochastic oscillator is below the 20 line which means it is in the oversold area. Moreover, the blue line of the indicator crosses the red line from below and continues above it. Now take notice of the Parabolic SAR. The dots of this indicator appear below the candlesticks. This is the perfect situation to open a CALL option.
Using the Stochastic and the Parabolic SAR strategy for a PUT option
This time, we are looking for a moment when the %K and %D of the Stochastic oscillator are in the overbought area (which means they are above the value of 80) and the blue line cuts the red one from the above and moves further down the red line. The Parabolic SAR dots appear on the top of the candlesticks. All this together signals a good moment to open a PUT option.
The strategy that combines the Stochastic oscillator and the Parabolic SAR requires that you will analyze the situation on the market thoroughly. You have to observe both indicators simultaneously. Only then the strategy will work. But with the guidelines from this article, you should not have any problems. Go to your IQ Option account and use the Stochastic and the Parabolic SAR strategy today.
Good luck!
Q&A: Stochastic Oscillator and Parabolic SAR Strategy🤔
- Q: Can the Stochastic Oscillator and Parabolic SAR strategy be used for all types of trading instruments?
- A: While this strategy can be applied to various trading instruments, its effectiveness may vary depending on the market conditions and the instrument being traded.
- Q: How can I improve the reliability of this trading strategy?
- A: You can enhance the strategy’s reliability by combining it with other technical analysis tools or by using it in conjunction with a comprehensive understanding of the market’s fundamentals.
- Q: Can I use this strategy for long-term investments?
- A: This strategy is primarily designed for short-term trading. However, you may adapt it to long-term investments by adjusting the indicator settings and timeframes.
- Q: Is this strategy suitable for beginners?
- A: This strategy requires a thorough understanding of both the Stochastic Oscillator and Parabolic SAR indicators. It may not be suitable for beginners without a solid foundation in technical analysis.
- Q: How can I manage risk when using this strategy?
- A: Practice proper risk management by setting stop loss levels, using position sizing, and limiting your overall exposure to any single trade or market condition.