Oscillator Stochastic (STOCH) is instrument of technical analysis which helps determine rate of change in prices by comparing closed candles (bars) in accounting period. The indicator mechanism is simple, but effective in experienced hands of financial analysts and traders. Stochastic oscillator is almost 70 years old. In 1950, married couple George and Carey Lane formulated and described the cherished indicator formula in their book. Now it is in standard sets of technical analysis instruments on trade platforms for most Internet brokers. And IQ Option is no exception.
How to choose and configure Stochastic on brokerage platform IQ Option?
User has to call toolbar in traderoom and select STOCH for start and configure.
Stochastic is a flexible instrument due to the large number of variables in tunings. It has graphical and numeric parameters. User can make changes to the periods of % K, % D curves and amount of their smoothing, as well as choose convenient oversold or overbought levels. Trader can specify the colour and choose line thickness for indicator components in setting bar. This is graphical variables.
The % K curve is a fast line, and % D is a slow one. These lines move together on chart, intersect, and diverge, than notify the trader of likely changes in market. The curves’ oscillation occurs within a certain zone of indicator. Instrument itself is located at bottom of the terminal, right below price chart and displays information in real time.
STOCH like most oscillators generates a lot of inaccurate signals. Therefore, in indicator tuning added a parameter of smoothing for curves. Instrument signals have become more qualitative with this value.
The oversold/overbought levels help to regulate the critical zones, i. responsible parts of oscillator chart, which inform the trader of a possible change in current trend. Levels 80; 20 are set by default, because they are common. Each trader sets for himself the appropriate level values for him depending on trading strategy used. But if user did not work with stochastic before, he should leave these default tuning and learn the principle of oscillator operation on broker demo account.
What signals are generated by Stochastic for deals?
The Lane’s stochastic oscillator generates the following signals:
- Intersections slow curve and fast line. Such signal shows the place of change in the strength of trend. If fast curve crosses line with a smaller period from top to bottom at top of indicator chart, it means that a bullish trend has weakened and price begins to move in a bearish direction. Conversely, when it is seen that fast line crossed slow curve at peak bottom point of oscillator chart, is a downtrend stopped and the price began to rise.
- Critical zones of overselling and overbought. Zone below 20% on the graph means that market is strongly oversold. In soon buyers will begin to form an upward trend in prices. The area above 80% of the oscillator signals that buyers are no longer profitable to buy and soon the price will begin to fall. Reliable signals are the outputs of % K, % D curves from overbought / overbought zones.
- Divergence. Divergence of oscillator chart with the price is bright signal of further correction and a reversal of trend. Trader needs to close deals on current trend and prepare for another direction when divergence is formed on trading charts.
Stochastic is primitive but verified financial instrument. If a market participant will use this oscillator correctly, he will receive many useful and accurate signals for deals. But each user must remember that market lives its own life and is constantly change. Only regular market analysis, unique strategy and practice help traders to make regular profits.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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