The Stochastics indicator is used in order to visualize an asset’s price momentum. This indicator compares an asset’s closing price to its price range over a given time period. The basis of the Stochastics indicator is that during a downward trending market, prices tend to close near their low and in an upward trending market, prices tend to close near their high. Like many indictors, this one should be used with other indicators while trading binary options and analyzing market movements. Indeed, one indicator by itself is quite meaningless if it is not included into a viable technique that can explain the market’s reactions to the wide variety of factors which are at play.

Understanding the Stochastic Indicator

Most of the time, you will set the Stochastics levels at 20 (oversold) and at 80 (overbought). The best signals will appear more clearly when the indicator is at these levels.

2C168 /% Stochastic Indicator

As shown in this screenshot, the best settings are:

• K Period. 5

• D Period. 3

• Slowing. 3

With this information, here are three methods to use the Stochastics indicator:

1. With Harmonic Patterns

2C168 /% Harmonic Patterns

As we can see in this graph (EUR/USD, time frame 1 hour), the Stochastics indicator combined with the harmonic patterns offers two potentially profitable trading opportunities. The first pattern is a bullish Butterfly (red-yellow pattern). Here you can see that at the level of the yellow tip, the Stochastics crossed under the 20 level. This was a strong signal for a long Call trade which a trader can execute on the broker’s trading platform.

The second pattern on the price chart is a White Swan (orange figure). Again, the Stochastics crossed under the 20 level, offering another long call trade opportunity.

2. Use of the Stochastics with the Ichimoku system

2C168 /% Ichimoku system

One more time (here on Gold), Stochastics show efficiency when integrated into a method or a system. The vertical red line shows a strong long Call signal which is confirmed by both Ichimoku and the Stochastics indicators.

3. With Moving Averages, BbandStop and Colored MACD

2C168 /% BbandStop and Colored MACD

Here is a more complex chart combination to spot many price trends within the same time frame. We use three exponential moving averages (set to 12, 20, 50 periods), the BbandStop, that is a trend following indicator as well as the famous colored MACD.

In the first trade opportunity (first vertical red line), the asset price was under the 3 moving averages. This trade was, therefore, more dangerous and money management was the key here. However, MACD was buying and going up, whereas the Stochastics crossed under 20 a few periods before. The BbandStop reversed and turned blue (long).

The second trade was easier to execute for price was above the moving averages. The Stochastics crossed under 20 again, MACD was weak but buying, and the BbandStop turned blue again. You can see that it was possible to make a great profit with this second trade as the BbandStop followed the trend for a long time before reversing (top right on the graph). Here if a trader made a Call option trade as the price trended up, they would have made a profit.

Conclusion

Every top indicator is worthless if used in isolation. While the Stochastics indicator is one of the most popular momentum indicator, it is most effective when used in combination with other indicators as well as markets news.