Stochastic is a price indicator that is part of the oscillators’ family. It is one of the most popular indicators among retail traders and we have designed this article in order to show you a simple method that could be applied to binary options as well. The method that we are going to show you is most often used for short-term opportunities, but if you intend to use it for longer duration binary options that are ok as well since the oscillator generates signals on every time frame.
General information about Stochastic
Stochastic is a technical indicator developed by George Lane in the ‘60s with the purpose to track the market momentum. It can be used to spot oversold and overbought conditions in the market. A level above 80% signals an overbought market, while a level below 20% signals oversold conditions.
How could you use Stochastic for binary options?
The first thing you need to do is to find an instrument that has a clear directional bias. After you have managed to determine the direction of the market (this should be done on a higher time frame than you intend to trade) you need to go to a small time frame and find extreme conditions on the other side of the market.
To give you an exact example, let’s assume that you have found a bullish trend on a 1h chart or 4h chart. You that go the 15 minutes chart or 5 minutes chart and spot the Stochastic oscillator giving you an oversold condition (around or below 20%). That usually means the market had consolidated after an impulsive move and a possible continuation higher could follow.
By placing your call when the Stochastic is oversold you can anticipate a new upward leg.
This is one of the simplest techniques you could use for effective binary options. If you are at the beginning with binary options and you find it hard to implement advanced strategies, try to stick to setups like this one as it could be much easier to trade.
Also, make sure to set up a risk management system and take that into account as well.