Stochastic oscillator is a momentum indicator. It doesn't follow the price or volume of the underlying asset. It's main use is to signal an impending trend reversal when bullish and bearish divergences occur.
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” then select Stochastic Oscillator.
The indicator's settings are as follows:
The %k line is simply the period. On IQ Option, this is 14 and blue in color. The period can be 14 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.
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.
The Stochastic Oscillator is one of the best tools to use to identify a possible trend reversal. 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.
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