Stochastic Oscillator settings will be the subject of today's article. A stochastic oscillator is a momentum indicator. It doesn't follow the price or volume of the underlying asset. Its main use is to signal an impending trend reversal when bullish and bearish divergences occur.
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Setting up the Stochastic Oscillator on IQ Option
Log into your account and select the asset you want to trade on a Japanese candle stick chart. Then, on the indicators feature, click on “Popular” and then select Stochastic Oscillator.
The indicator's settings are as follows:
The %k line is simply the period. On IQ Option, this is 13 and blue in color. The period can be 13 months, years, days etc. The %d line is a simple moving average of %k and orange in color. The next two lines are the overbought (80) and oversold (20) lines which are green and red in color. I recommend leaving all settings the same before applying this indicator to your IQ Option trading chart.
What is the best setting for stochastic?
All technical analysis boils down to saying that history is repeating itself. It repeats itself like a self-fulfilling prophecy. This is because traders use the same tools in similar ways and these actions affect the price of assets.
The Stochastic Oscillator is also mostly used in a certain way. Most traders use this indicator with the Stoch(14,3,3) setting. Therefore, after applying the indicator to the chart we recommend changing the default period from 13 to 14. Of course, the difference in the appearance of the indicator will be very small and maybe even meaningless in 99% of cases. But period 14 is used by the majority. For reasons unknown to me IQ Option has decided to use period 13 in this indicator as the default value. The other indicators generally have default values in line with those commonly accepted.
Here is a small note on the Stochastic Oscillator settings. If you decide to increase the period of the indicator, for example to 30, you will notice that it enters the oversold and overbought zones later and less frequently. Trading with these Stochastic Oscillator settings is still possible and can be profitable, but any change in parameters should be investigated and checked on historical charts.
Trading using the Stochastic Oscillator on IQ Option
The Stochastic Oscillator is a versatile trading tool that can be used in 2 ways.
Using Stochastic Oscillator to identify overbought and oversold areas
As the Stochastic Oscillator crosses above the 80 line, the markets are said to be oversold. But note what happens when the indicator is still above the 80. If the %k cuts the %d and starts moving under it, it's a signal of an imminent trend reversal. This is the time to enter a long sell position.
On the other hand, when the Stochastic cuts below the oversold line, observe where the %k cuts and moves above the %d. This is a signal that an uptrend is imminent. This is the best place to enter into a long buy position.
Using Stochastic Oscillator divergence to trade on IQ Option
Divergence occurs when the price and the indicator aren't moving in the same direction. Remember the Stochastic Oscillator doesn't follow price so this is completely normal.
So what does this all mean? Divergence is usually accompanied by a support/resistance break on the price chart. This means that a new trend and very likely in the opposite direction will occur soon. Divergences can be observed regardless of the Stochastic Oscillator settings.
The Stochastic Oscillator is one of the best tools to use to identify a possible trend reversal. Just remember to correct the Stochastic Oscillator settings on your chart. It takes time to learn how to read and use this indicator. Luckily, you can do so on the IQ Option practice account. Open one for free and start trading using this indicator.
Good luck!