The Stochastic binary options’ indicator is one of the most popular auxiliary tools for a trader. It is based on two lines which move in the certain range. These lines send signals to buy binary options. For example, if we consider a divergence, the bullish divergence shows a trader that the market will reverse upwards soon, and it is needed to wait until the reversal time to buy the Call option. If the bearish divergence is forming in the market, a trader has to wait until the time when a price reverses down and buy the Put option.
If you trade using the Stochastic binary options’ indicator, you can receive trading signals not only from the divergence, but from the crossing of the indicator’s lines between each other too. The crossing itself sends a clear signal to buy either Put or Call option, depending up where it occurs (up or down). But in order to apply this indicator in different situations, a trader will possibly have to refrain from using the standard settings and choose his own settings. The choice of a period influences the quality of the sent signals directly.
Stochastic indicator: part one
The binary options’ indicator Stochastic is an oscillator. This indicator is present in many indicative binary options’ strategies and is frequently applied by traders in trading. The core of this auxiliary tool consists in its goal to show the current closing price in the price range for the certain time interval.
The Stochastic binary options’ indicator consists of two lines: the first one is short and the second one is smoothing. The first of lines is called %К and the second is called %D. The smoothing line on a chart turns out to be the secondary moving average from the %K line.
The Stochastic binary options’ indicator is the true oscillator. The principle of its trading signals is the same as for the other oscillators. It’s necessary to note that all market prices are consensual between buyers and sellers at the certain point in time, and they reflect the fair value in this market. As for the maximum values, they show the strength of bulls in the market in the particular period of time. Minimums reflect the strength of bears in the particular period of time too.
The particular range of the price levels forms between the maximum and the minimum prices. This binary options’ indicator provides a trader the possibility to understand whether buyers and sellers are able to fix the closure of prices at the boundary of the trading range. If a price for the particular trading asset grows, the closing price moves towards the upper bound of the price range. Alternatively, if prices decline, the closing levels move towards minimums.
The divergence can be referred to the main trading signals which are sent by the Stochastic binary options’ indicator. When the asset’s price grows and, at the same time, the new price maximums become higher than the previous ones, and the new maximums on the indicator turn out to be lower than the previous ones, we can conclude that there is the bearish divergence. In this case, a trader has to prepare to buy the Put binary options. It’s important to mention that a trader has to prepare to buy only, but not buy them yet. In order to enter into the market, the best thing to do is to wait until the divergence starts to work off, in other words, until the descending movement begins. This is because the divergence can stay in the process of formation for a pretty long time. And the prescheduled purchase of the option at this time can lead to a loss of the deposit’s piece.
If the current minimums of trading tool continue to form lower than the previous ones, but, at the same time, the indicator shows minimums that form higher than the previous ones, we can conclude that this is the bullish divergence. In this situation, a trader can prepare to buy the Call option. But, as well as in the situation with the bearish divergence, it is required to wait until the price reverses up. It is important because the divergence can form for a fairly long time. And the prescheduled entry into the market may bring losses to a trader.
Stochastic indicator: part 2
We have considered the main working principles of the Stochastic binary options’ indicator in the previous part. There we have also described one of the trading signals sent by this auxiliary tool. But the divergence is not the only one way to earn using the Stochastic.
The Stochastic is the oscillatory indicator, so it shows to what extent the trading tool is overbought or oversold at the current time. If the lines of the binary options’ indicator Stochastic enter the zone 20 or lower, in other words, if they tend towards zero, an asset is considered oversold. In this case, there is a high probability that it will reverse and move up soon. In this case, a trader has to wait until the reverse of a price up and buy the Call option. As with the bullish divergence, you have to only wait until the reverse occurs because only in this case the signal will be considered as confirmed.
When the lines of the Stochastic binary options’ indicator get in the zone higher than 80 and move towards 100, it is supposed that the market is overbought. It shows that the reverse will occur in the nearest time, and the price will move down. This situation shows a trader that it is necessary to prepare to buy the Put option. As in the previous situation, the Put option has to be bought only after the reversal of a price down.
It’s important to note that the binary options’ indicator sends such a signal only when the market stays in the sideways movement. In other words, it means that the price moves from the particular resistance level to the particular support level horizontally. This is so because if the trend in the market is formed, the line of the Stochastic binary options’ indicator stays either in the overbought or the oversold zone depending up the situation for a pretty long time.
Another signal sent by this indicator is the crossing of lines %К and %D. If these lines move parallel with each other, it means that there is the short-term trend in the market already. When one line crosses the other one, we can conclude that the strength of buyers or sellers is almost exhausted. For instance, if the lines move up, there is the short and the ascending trend in the market. And when they cross in the upper zone, a trader receives the signal that the short-term and ascending trend weakens and the reversal down is possible. The time when these two lines cross is the time when a trader may buy binary options (with the short-term expiration).
The Stochastic binary options’ indicator can work with different time scales. It’s necessary to note this auxiliary tool sends the leading signals compared to the binary options’ trend indicators. It’s also important to pay attention to the initial parameters that will be used during a work. This choice can directly depend on which trading system exactly is used by a trader in the binary options’ trading.