stochastic oscillator iq option
Guide for using the Stochastic Oscillator to trade trend reversals on IQ Option

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.

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.

setting up stoch at iq option
Setting up the Stochastic Oscillator on IQ Option

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.

stochastic oscillator settings
Stochastic Oscillator on IQ Option

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.

stoch in overbought and oversold areas
Trading using Stochastic Oscillator based on oversold/overbought areas

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.

divergence on stochastic oscillator
Stochastic Oscillator divergence

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!

General Risk Warning: The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose

How useful was this post?

Click on a star to rate it!

Average rating 4.5 / 5. Vote count: 47

No votes so far! Be the first to rate this post.

As you found this post useful...

Follow us on social media!

We are sorry that this post was not useful for you!

Let us improve this post!

Tell us how we can improve this post?

Niels Hammer

Trading and investing are lifelong pursuits for me, and I will most likely never stop learning about them. I started trading with IQ Option in 2014 and have been with them ever since. And I've seen the platform mature. Nowadays, I'm very interested in cryptocurrency and am attempting to learn and invest my time and money in it. On the other hand, I try to help you guys as much as I can with this blog. Happy trading!

Leave a Reply

Your email address will not be published.

13 + thirteen =