Some analytical tools have great power combined with others. Today we will tell you how to use stochastic oscillator in combination with price action. One of the important skills you must develop as a trader is identifying and drawing support and resistance lines. However, Support and Resistance cannot be efficiently used on their own. You'll need to use an indicator alongside support/resistance to identify the best places to enter the position. One efficient indicator is the Stochastic Oscillator.
This guide will teach you how to use the Stochastic Oscillator alongside support and resistance.
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Stochastic Oscillator alongside Support and Resistance
As the price of an asset moves in any direction, there are price points where it doesn't seem to go past for a while before finally breaking out of these price points. These price points are what traders refer to as support and resistance levels. You can read more in our guide: Support and Resistance, the two best technical indicators that IQ Option players must know.
Now how can you tell that prices are likely to remain within the support/resistance range? And how can you tell how far the price will go before rebounding?
You could try squinting at your chart and try to identify these points manually. But a less strenuous strategy would be using the Stochastic Oscillator that IQ Option provides. We've written a more detailed guide, Instructions for using the stochastic indicator to increase the probability of a reversal when trading on IQ Option
How to use Stochastic Oscillator on IQ Option
We will present a full stochastic oscillator strategy today, but we will start with the basics. Click on the “indicators” tool at the bottom of your Japanese candlesticks chart. Next, select “Momentum” and then “Stochastic Oscillator”. Stochastic oscillator best settings are default ones, but we will make a small adjustment.
Next, select the period K (14) and period D (3) along with their color and thickness. Setting that we receive stochastic oscillator 14, 3, 3 (is one possible way of expressing the parameters of a indicator). After this, adjust the overbought and oversold settings. In this example, I'll let these remain at 80 and 20. Finally, click on the apply button.
Stochastic indicator buy and sell signals
How do you analyze a stochastic oscillator?
The Stochastic Oscillator has four lines. The overbought and oversold lines run horizontally and parallel to each other. The other two lines are the Period K (blue) and period D (red) lines.
Your objective when using this indicator is to look at the K and D lines' behavior when they cross above or below the overbought or oversold lines. When the period D line cuts across the period K line from below while both lines are moving up above the oversold line, make a buy order.
If the period K line cuts across the period D line from above and goes below the period D line. Both lines are moving down under the overbought line, you should place a sell order.
Placing buy order on IQ Option
Place a buy order when the period K line crosses the period D line from under the oversold line.
If you're using support and resistance only you can make money trading the range. However, telling where the price will break the support and resistance can prove difficult. That's why using the Stochastic Oscillator is so important.
The Japanese candlestick chart you use is also important. If you're trading 5-minute candles, your chart should be for a 30 minute or 1-hour time frame.
Placing a sell order on IQ Option
Place a buy order when the period K line crosses below the period D line. As both lines move down under the overbought line, these are signals to place a sell order on the IQ Option platform.
When to enter and exit trades is very important if you want to make money using the Stochastic Oscillator and support/resistance on IQ Option. Immediately the Stochastic lines cross the overbought or oversold lines, you can open longer positions. However, if they run within the period lines, your trades should be shorter.
BONUS: Typical concerns when using the Stochastic Oscillator
What is the best setting for stochastic oscillator?
Usually, the best settings are the default settings that the IQ Option platform gives us. In the case of the stochastic oscillator, these are 13, 3, 3 and the horizontal lines at levels 20 (oversold) and 80 (overbought). Note that some traders use a value of 30/70 for the oversold/overbought levels. With this setting, they identify the market earlier as overbought or oversold. Unfortunately, this is often too early. When the oscillator reaches the 70 level, the price usually continues its upward movement. Likewise, when the Stochastic reaches the 30 level the price often continues to move downwards for a while. Reversal trades in such situations can turn out to be premature and loss-making.
Is Stochastic a good indicator?
Any indicator has the potential to be a good one if used as part of a strategy that works. An indicator in itself is just an arithmetic transformation of historical price data. It is the same with a stochastic oscillator. It is just a mathematically transformed price and there is no magic here. It is one of the oldest indicators used in technical analysis and is part of many successful strategies. Including the one we have described today. You can read about the stochastic oscillator in almost every technical analysis book. It is popular and, when used correctly, is a really useful indicator.
Now that you've learned how to use the Stochastic Oscillator alongside support and resistance, try out these tips on IQ Option and share your results in the comments section below.
Good luck!