The stochastic oscillator is a momentum indicator that aims to compare the closing price of a certain instrument to a range of its prices over a specific period of time. Its sensitivity to market movements depends on the time period set, as well as the moving average of the results. The main use of this indicator is to signal a possible trend reversal when the bearish and bullish divergences happen.
It’s also important to note that this indicator doesn’t follow the price or volume of the asset from which the value was derived. In this Binomo guide, I’ll tell you how to use the Stochastic Oscillator for trading trend reversals.
How to set up the Stochastic Oscillator on Binomo
First, log into your Binomo account and select an asset. Click on the Chart Preferences button and it will show you the Indicator tab. You’ll see Stochastic as the fourth option on the list. Click it.
Next, set up the indicator based on your preferences. The default value for overbought is 80, the default value for oversold is 20, and the default value of period is 14. You also have to change the colors of the lines. In my experience, I always change fast to white, overbought to green, oversold to blue, and slow to red.
Keep in mind that the fast line is also called the K line while the slow line is also called the D line.
How to trade using the Stochastic Oscillator on Binomo
As a versatile trading tool, the stochastic oscillator can actually be used in two different ways. We’ll discuss both of these below so that you can understand them better and hopefully implement them in your own trading method.
Using identified overbought and oversold areas
When the stochastic oscillator crosses the 80 value, we can consider the markets as oversold, which means the prices are bound to come down soon. Over the 80 value, when the K line cuts the D line and starts moving under it, it’s a good signal that a trend reversal will be happening soon. This means it’s time to enter a long sell position since a downtrend is imminent.
Conversely, if the value is below 20 and the K line cuts and moves above the D line, you should probably enter a long buy position, as this means that an uptrend is coming soon.
Using divergences
Occasionally, there might also be divergences, which happens when the price and the indicator don’t move in the same director. Although it’s not too common, there’s no need to be worried when this happens because it’s completely normal. After all, this indicator doesn’t really follow the price or volume.
When a divergence happens, it’s typically accompanied by a support/resistance breakthrough. In other words, it also signals the start of a new trend, possibly even a trend reversal.
Should you use the Stochastic Oscillator?
The Stochastic Oscillator is a fantastic tool that you can use in order to identify possible trend reversals. It’s actually one of the most favored indicators out there by professional traders due to its ease of use, simplicity, and accuracy. Whether you’re a seasoned trader or a beginner trader, you’re sure to see some benefits from using this indicator.
Did you learn a lot from this guide? Feel free to let us know in the comments below! And of course, if you really want to perfect your usage of the stochastic oscillator, the best way to do so would be to open a practice account on Binomo right now, completely free of charge! You can also check out our other strategies here to level up your trading game!
Good luck on your trading journey with Binomo!