There are a lot of risks associated when you use stochastic crossovers for trading. To begin with, what is stochastic? It is a famous tool for trading, but it I ideally used with other signs instead of being used as a single strategy. When used as a strategy for trading, stochastic can leave its users wanting for more. However when combined with other trading tools it can be an efficient way to identify trends, support, resistance, and points. Stochastic is known as an oscillator tool that is the same as RSI and MACD. Such tools measure the movements of the market in many ways, but these are geared towards direction strength through time.
Oscillators typically stir in a way than can go above and below zero or between zero and a hundred as stochastic’s case. When stocks rise, the oscillator can also move up. Its movement trends in a way that imitates the primary stock movement. Basically, oscillators can stir in the positive/negative extreme range, in a bullish market. This can also go up to a bull extreme in a bearish market. These extreme level moves are not reversal signals but possible points of entry in underlying trends.
HOW DOES IT WORK?
Futures trader George Lane is responsible for creating Stochastic. It was originally created for future’s trading and is based on shorter time frames. These time frames also make it better with binary options trading. The process presumes that in good trend stock prices will be able to close at the top part in one day and that downward trend prices will close in the bottom part in a day. The indicator makes use of two lines, %D and %K. The former is a smoothened version of the %K and it is more vital. The %K, on the other hand, is the day to day’s variation measure of closing prices of stocks. Because it is very short term, it is unstable and may offer a lot of fake signals. When you plot the results, you will see two lines moving between zero and one hundred. The %K may be hard to read even though it may generate noticeable patterns. A signal line for %K is created as the %D line smoothen data for crossing over. It also provides its own signals.
USING STOCHASTICS FOR CROSSOVERS
When you use stochastics in binary options you can use two major methods. The first method is when %D line goes to the extreme and then reverses and then crosses back to extreme range. This actually signifies strength in a bullish market but on the opposite site is a weak sign in a bearish market. The moment %D moves right below a bearish extreme and crosses over is when a bullish crossover happens. Signals can be longer depending chart time frames. Moreover, two or three crossovers occur before any assumed movement happens.
WHAT ARE LONG TERM CROSSOVERS?
In simpler terms, crossovers simply mean a line crossing over another. In long term crossovers, the %K line is crossing over %D. Nonetheless, you need to understand first the trend behind it so that you can effectively use the technique. This is because when you use such technique for trading against a trend then you could have big losses. Presuming that there is a bullish trend, the crossover may be when %K line moves below %D and crosses over to %D. In bearish markets a crossover may happen if %K is moving just above %D and then crosses over back below %D.
WHY IS THIS GOOD TECHNIQUE?
There is only one huge reason why the crossover signals on stochastics’s technique is good. Primarily, it offers a dependable entry signal in bear and bull markets. When you successfully recognized the trend scholastic, you can find crossovers in shorter, middle, and longer term charts. These are really strong signals when one or more time frames join and then give signals all at once. A union of stochastic crossovers is like a sea with a tide coming. The tide slowly moves in and at a point the waves then ripple while simultaneously pulling back. This is just like markets when there are corrections. The wave pullback provides a chance for another wave of traders or investors to enter and make higher marks. Stochastic crossovers mainly measure market ripples and waves and once they unite it can also provide a signal that another wave of investors is coming.
WHY IS IT A NOT SO GOOD TECHNIQUE TO USE?
One reason why it is not so good is that they lag especially when you do not pinpoint them correctly. Crossovers can happen anytime and in random markets. When you rely on these crossovers for your signals, there is a huge opportunity that you will not be able to see huge profit portions or worst – lose lots of money. Similarly, when there is no strong trend in the market, there is a probably that crossovers can be fake signals.
Generally, stochastic crossovers are great especially when you use it together with other techniques and tools.