Strategy 2 Stochastics – earnings on two oscillators

We have already written about the Stochastic indicator: what are its features, how to set it up and use it in trading. But we left some things for later. Therefore, as promised, we will now tell you on our website about Stochastic strategies for binary options that you can apply in your trading to increase your profit.

But first, let’s briefly delve into the theory and talk about the signals of one of the most popular oscillators, which have not been mentioned before.

Indicators used in the strategy

The stochastic indicator evaluates the position of the Close price in the High/Low price range for the period specified in the settings. Using two oscillators with different settings allows you to assess the situation on the market over a short- and medium-term period.

In the TS, work is not carried out with the chart at all, only with indicators. You will need to add two Stochastics to the chart with the following parameters:

• 9, 3, 3 – considered fast in this Forex strategy.
• 21, 9, 9 – slow oscillator indicator, used as a filter.
• The oversold/overbought levels are 80 and 20, respectively. For low-volatility assets, they can be transferred to 70 and 30.

For trading you only need 2 indicators.

The main disadvantage of oscillators of this type is that during the trend line they hang for a long time in the overbought/oversold area . The two-stochastic strategy is also not without this drawback.

The settings are given for timeframes M5-M15; for higher timeframes you will have to experiment and select the parameters yourself. As the period of the slow Stochastic increases, the delay in receiving the signal increases, but the chance of receiving a loss decreases. You will have to find a balance between signal speed and reliability.

About settings and options

First, on the live chart, select the Stochastic or Stochastic RSI indicator.

Then you need to click on the “gear” icon to open it and be able to configure its parameters.

For a regular Stochastic, popular values ​​look like this:

• Length = 14;
• %D = 3;
• %K = 1.

Here are the popular values ​​for Stochastic RSI:

• %K = 3;
• %D = 3;
• RSI Length = 14;
• Stochastic Length = 14.

Important: We do not recommend changing these settings, since competent traders set everything up a long time ago. Your task is to test these tools on various assets.

How is the two stochastic strategy used?

There are several methods of working with this vehicle:

• Enter the market immediately after the lines of both oscillators are in the oversold/overbought zone. If they are in the oversold zone, only purchases are considered; in the overbought zone, sales are considered. Trading this way is quite risky; there is a risk of getting into a strong movement when the lines of both oscillators remain outside the 80/20 levels for a long time.

An area has been identified where trading using the method described above would have brought several losses in a row.

• Conclude a deal when the lines cross on the fast Stochastic, while on the slow one the lines should be in the oversold/overbought zone. Additional filter – you can wait until the fast oscillator lines leave the zone. Strategy 2 Stochastics brings fewer unprofitable signals, some profitable entries are missed, but the overall profit/loss ratio increases.

When waiting for the fast oscillator lines to go beyond the level of 80 or 20, there is a risk of missing most of the movement.

An example of a deal.

• The most conservative tactic is to wait for the lines on both oscillators to cross . The fast indicator signal must be confirmed by crossing the slow Stochastic. At the same time, on a fast oscillator, the lines should not return back to the oversold/overbought zone.

An example of buying after crossing the lines of the slow Stochastic.

Recommendations for stop loss and take profit when working on TS 2 Stochastic:

• Stop Loss can be placed behind the last local extreme or behind the High/Low of a reversal candle if a signal appears on it.
• Take Profit – either fixed at 1.5-2.0 times more than SL, or close the trade manually after the slow oscillator gave the opposite signal. You can simply use a trailing stop.

The examples considered the strategy of two Stochastics for the euro/dollar, but it also works on other currency pairs. It is advisable to limit the choice to volatile currency pairs, otherwise the profit will be too small.

Using a binary options trading system

When working with binary options, the main difficulty is choosing the expiration date. If a Forex trader can wait out an unfavorable period, then with options it is necessary to determine the expiration date of the option in advance.

If the strategy two Stochastics for the euro/dollar or any other currency pair is used on binary options, then we can advise:

• Do not work with low-volatility assets.
• Choose the expiration date at the level of 3-5 Japanese candles.
• Work on confirmed signals. That is, at least wait for the lines to cross on a slow oscillator.

An example of buying a Call option based on a signal from two oscillators.

The two stochastic strategy for binary options carries more risk than for Forex trading. Its main drawback is that there is no guarantee that the price will move in the desired direction immediately after receiving the signal.

Author of the oscillator

The Stochastic indicator for binary options was developed by analyst George Lane . He began working on creating a tool that would help in trading back in the 50s of the last century. The formula proposed to him by an immigrant from Czechoslovakia was taken as a basis. Lane's assistants modified it and successfully used it on the stock exchanges. Thanks to such an oscillator, traders were able to measure “momentum” when the value of an asset begins to change. By “momentum” we mean the difference between the present and current value, as well as the price that was active a certain number of periods ago.

In 2007, George Lane said in an interview that trading Stochastic provides a number of advantages. Using this tool, you can determine price changes for the required assets in real time. The trader will see this, will be able to quickly navigate and make a profit using the right approach.

Recommendations for work

Despite the fact that the strategy is an indicator one, not all signals are worth taking into account. Recommendations for work are as follows:

• It is necessary to take into account the behavior of the lines of the slow oscillator. If they have been, for example, in an oversold zone for a long time and have crossed there several times, then it is better to open a long position only after the lines not only intersect, but also leave it.
• The position of the lines on the quick indicator is also taken into account. This is especially important if you work on binary options. Example – a signal to open a long position was received from the slow Stochastic, at the same time the fast Stochastic line is already near the overbought zone. In such a situation, it is better to refrain from shopping.

An example of a situation in which it is better to refrain from shopping.

• Although the strategy does not require this, it is advisable to take divergences into account.

The two Stochastic strategy for the euro and dollar shows one of the best results. You can also work with other currency pairs, but the profit may be lower.

When working on a strategy, you can use support/resistance levels, Price Action candlestick patterns, etc.

Divergence

We mentioned above that the Stochastic oscillator is capable of showing the phenomenon of divergence in the market. It is observed quite often in the market, so every trader must recognize this phenomenon.

When the price diverges from the movement of the Stochastic, you know that you are dealing with divergence. It signals an imminent price change.

Stochastic is up and the price is down

From the screenshot below you can see how the price is gradually decreasing. At the same time, the Stochastic indicator shows a signal to buy a Buy option. This is divergence. In this case, you should look for a signal not at the price, but look at what our oscillator-type indicator shows. After some time, the price changes direction and confidently moves up.

Stochastic is down and the price is up

The price moves up, and our assistant, called Stochastic, deviates from it in the opposite direction. Here, as in the first case, you should trust the indicator signal.

Modification of strategy

There is a technique for working with 2 oscillators, but using large periods. In this case, the parameters for the two Stochastics are as follows (given for a 15-minute chart):

• 480, 480, 1 – assesses the situation on the weekly timeframe;
• 96, 96, 1 ​​- is responsible for the state of the market on the daily chart.

The work strategy is as follows:

• On the 15-minute chart on the slow Stochastic, you need a section when the %D line (red dotted line) changes direction in the oversold/overbought zone. At this time, you can open a deal, but with a large stop as for M15.
• Fast Stochastic is needed in order to take profits. You need to close the deal after the %K line enters the overbought zone (if selling is open) or oversold (if buying). This strategy can be used for other currency pairs, but it is better not to use it in the stock market.

An example of concluding a deal and taking profit.

This 2 Stochastic strategy is not suitable for binary options. After receiving a signal, the price does not immediately move in the desired direction, so it is difficult to choose an expiration date.

Martingale Advisors with Stochastic

You can trade with the Stochastic indicator without a strategy. To achieve this, various portals offer various additional programs. The most popular are Martingale and Stochastic advisors. The basic principle is no different from the strategy for binary options according to the classic Martin, but Stoch is added, which adds accuracy to transactions. But we still do not recommend using them, and there are a number of reasons for this:

• Martingale advisors, even with Stochastic, are too risky. Without a substantial deposit, the chance of bringing the broker’s balance to zero is high;
• For using third-party programs, binary options brokers can simply block your personal account and make it impossible to withdraw funds;
• There are few Martingale and Stochastic advisors and almost all of them have been tested on the Forex market. Therefore, it is unknown how useful an assistant they will be to a binary broker;
• You can only get a demo version for free with limited features or for a certain period. You will have to pay for the full version.

We would not recommend giving money for a Martingale advisor with Stochastic, since in this case you risk losing your deposit and the opportunity to trade with the broker.

But don’t worry, we will next offer 2 strategies that will allow you to earn money without any third-party programs. At the same time, you will be able to analyze each transaction and eliminate all errors in the future. This cannot be done with an automatic program.