Trading Binary Options using the Stochastic Indicator

The Stochastic is one of the most popular indicators for trading Binary Options. The Stochastic is oscillating between two extreme values (0 and 100). The indicator is able to evaluate the momentum of a price trend and identify also divergences.

 

Stochastic can generate many different types of trading signals including entry, exit, trend reversals, support & resistance etc. The most reliable trading signals occur in multiple timeframes and not in just one timeframe. For more reliable signals the readings of the indicator should be combined and confirmed with another technical analysis tool (for example Fibonacci retracement).

 

Trading with Stochastics at a Glance

■ The Stochastic can be used in any market but it is best used when trading Forex Major Currencies (especially EURUSD and GBPUSD)

■ In a 5-minute timeframe, you will normally get 2-4 trades per day

■ Stochastic Indicator can be combined with Fibonacci Retracement, Bollinger Bands, RSI, Moving Averages and the Directional Movement Index for more reliable signals

■ Stochastic standard settings (14,3,3) but for trading Forex in short-term timeframes use settings (5,3,3)

■ The two key Stochastic readings are: 80 (signals overbought levels) and 20 (signals oversold levels)

 

The Stochastics Indicator Formula

This is the Stochastic Indicator formula:

■ %K = {(Last Price - Lowest Low in K period)/(Highest High in K period - Lowest Low in K period)} X 100

■ K represents the number of periods.

■ The standard Stochastic settings (14,3,3)

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