Today in this article, I am going to talk about one of the most popular trading indicators i.e Stochastic Indicator or you can call it Stochastic Oscillator. this indicator is one of the most popular trading indicators and in this article, I am going to cover each and everything about the same.
About Stochastic Indicator
=> Stochastic oscillator or Stochastic Indicator is a momentum indicator that uses support and resistance levels. the indicator was developed by George lane in 1950.
=> This indicator is made from the composition of two moving average lines name %D and %K which does not follow the price nor the volume of the same. It follows the speed or the momentum of the security price.
=> Just like RSI, this indicator uses the overbought level and the oversold level and you can use these two levels to identify the upcoming bullish and bearish trend.
=> The indicator line oscillates between 0 – 100. when the two lines is oscillating between 0 – 50 it means the market is at an oversold level similarly when the indicator line is oscillating between 50 – 100 it means that the market is at an overbought level
The overbought level is the market situation for security which indicates the end of the buyers’ domination. At this level, the demand for the asset decreases and supply is higher which results in a decrease in the price. when the security price has reached the overbought level it means the price of the security has reached the maximum level and from here the price of the security is most probably going to decrease which will result in a higher sale and seller domination.
Similarly, the oversold level indicates the end of the seller’s domination. At this level the supply of the asset is limited and demand is higher which results in an increase in the price of the security. when the security price has reached the oversold level it means the price has reached the minimum level and from here the demand and price of the security is most probably going to increase.
How to trade with Stochastic Indicator?
Stochastic oscillator is made from the composition of two moving average lines i.e % K and % D line where %D uses 3 periods SMA line while % K uses a 13-period SMA line. these two lines oscillate between the overbought and oversold levels and the moment they interest each other it generates buy and sell signals.
When the % K and % D intersects below line 20 it signals an upcoming bullish trend and vice versa when the two line intersects above line 80 it signals an upcoming bearish trend.
Given, above is the 15-minute chart of GBPUSD and we can clearly see the indicator intersects below line 20 so here we can place a buy trade for 15 minutes.
Similarly, given above is the 15 chart we can clearly see the two lines intersect above line 70 so, here we can place 15 mins sell trade.
So, this is how you can trade with Stochastic indicator and I hope you understood the basic concept. If you still have any doubt do comment below. the best thing you can do is try this indicator on the IQ Option demo account and move to IQ Option real account once you are confident enough.