Stochastic Oscillator

Stohastic Oscillator

Stohastic Oscillator

Stochastic oscillator is a technical investment analysis tool used to measure a security’s closing price in comparison to its price range over a given period of time. The process is used to help traders determine the best time to buy or sell a security. It’s based on the theory that as a security’s price increases, it will tend to close at its highest point of a given period of time. On the other hand, as the price declines, its closing price will fall to its lowest point.

Stochastic oscillator is one of the most important tools and t no successful trader can ever imagine trading without it. In the next paragraph we will explain how exactly this tool is used, so read on!

Stochastic Oscillator | Find the Cross

The numbers are plotted on a graph side-by-side and the fluctuations range between zero and 100. If the stochastic is above 80, the security is overbought. If it’s below 20, the security is probably oversold. The most important thing regarding the stochastic oscillator is to look at the cross between those two lines (the security’s price and the indicator’s) and see if the market is in the Overbought or Oversold Territory. If it is, than it’s time for you to react. You can reduce the tool’s sensitivity if you change the time period, so that you can observe the market in different ways and different time frames, but the principle remains the same. 

Stochastic Oscillator | How to Interpret It?

There are many advantages to using your stochastic oscillator, and there are many ways to find the strike price. The default settings are level 80 to the upside and 20 to the downside. The cross won’t be interpreted correctly if it’s between the levels 20 and 80 and it’s more valid if it’s above 80 and below 20. You can add an intermediary level (let’s say 50) that will help you make a better prediction. If a trend is bullish (when the stochastic breaks the level 50) you should enter the call option. In a bearish trend you should put an option if the stochastic oscillator breaks the level 50 to the downside.

You will notice very quickly that this tool is very easy to handle. The representation is very clear and there are absolutely no graphic elements that could confuse you. You can also try it via various trading platforms, and you can even download some variations of the tool for free!

Stochastic Oscillator | Conclusion

The fact that the stochastic oscillator is very easy to understand makes it probably the most popular tool in the world of binary options trading.. You don’t have to put a lot of effort into interpreting your data, and it can still help you a lot. It will definitely become one of your best friends in your trading career, no doubt about that. So better start learning quickly: learn how to interpret the stochastic oscillator and improve your trading skills!



1. Midas Technical Analysis: A VWAP Approach To Trading And Investing In Today’s Markets (A. Coles, D. Hawkins, 2011)
2. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (N. Taleb, 2005)
3. A course in financial calculus (A Etheridge – 2002)
4. Market Wizards (J. D. Schwager, 1989)
5. Technical Analysis Of The Financial Markets: A Comprehensive Guide To Trading Methods And Applications (J. Murphy, 1999)

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Author: Ben Prescott

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