In this journal entry, I’m going to demonstrate how to use stochastic oscillator for binary options trades.
The stochastic oscillator is a quite popular indicator among beginners and advanced traders. It is very easy to use and give useful insights into momentum and when it is on the verge of reversing to help identify entry and exit points.
So let’s examine in more detail how this indicator works and investigate step by step how to apply it in trades and grow our investments.
Stochastics Oscillator trading summary
The stochastic oscillator is comprising the difference between a closing price and the high and low price during the same period.
This indicator is calculated with consideration the price action of the last 14 periods. Typically, the oscillator varies within a range around the mid-point denoted as the 50 level. The full range between the top and bottom is 100.
Also, it is important to note that 20 is a key level of range downside, and 80 is a key level of range upside.
Stochastics is measured with two lines: %K (Blue line) and the %D (Red line). You can find here how mathematically those lines looks. Fortunately, the charting software does all these calculations and make the whole technical process much easier.
%D line is particularly important since it is used to identify bullish or bearish signals depending on its position in the range.
If the line is above 80 level, this indicates the possibility of overbought and if the line is below 20 level, it indicates that the asset may be oversold.
The first operation was carried out with the USD/JPY currency pair. As we can see on the chart, stochastics oscillator crossed upside level of the range. Lines of stochastics oscillator are in the overbought territory. It is a good time to buy a ‘put’ option.
Ultimately oscillator indicated the correct price movement. I invested $100 with 75% profit which resulted in $75 in profit.
This trade was taken with EUR/USD currency pair. From the chart, we can see that stochastics oscillator crossed 20 level and as we remember it is a signal that indicator is in oversold territory. We can assume that the price will grow and it is a good time to buy ‘call’ option.
As we noted sharp movements in the price change did not take place but luckily, the option expired with 75% profit.
The next trade I chose the Apple stock because according to the chart, stochastics oscillator was in the oversold territory and I bought ‘call’ option.
Unfortunately, the signal was not strong. But my broker gives some return even in the case of incorrect predictions, so I lost $47.50 instead of $50.
The next currency pair that showed a signal to trade was GBP/JPY. Stochastics Oscillator’s lines are under the downside level, so we can assume that the price will grow.
The prediction was right and made extra $37.50 for me.
The last trade I made with the AUD/USD currency pair. Stochastics oscillator is in the overbought territory, but from the chart, we can see that there is a prevailing uptrend. In such cases, the signal is less strong. I decided to take a chance and bought ‘put’ option, but the risk was unjustified.
I lost $47.50 on this trade. So I advise you to use the stochastics oscillator in unambiguous cases.
In this trading journal, I demonstrated how to use stochastics oscillator to determine the direction of price movement. My predictions were right in 3 cases from 5 what’s good since profit is still on my side.
A real-life example is worth a thousand words and hopes that this article will be the best explanation of stochastics oscillator. I would appreciate hearing your opinion so feel free to add comments below.