Binary Options with Stochastic Indicator
Stochastics have been used as a predictive stock indicator since the late 1950’s and are applied to a broad range of trading today including binary options trading. It is a trade analysis that is made based on a ‘stochastic oscillator’, which is simply technical analysis that uses a momentum indicator by comparing a securities asset’s current closing price with its historical price over a set period of time. It is an oscillation type indicator.
Stochastic oscillators tend to have reduced market sensitivity and area more accurate means of determining potential asset price movement when established using an adjustment of a time period or when they are calculated by using a moving average to determine them.
Contrary to popular belief, a stochastic indicator does not follow price or volume. It is an analysis tool that follows the momentum of price. Things such as bearish and bullish divergences can then be used to predict trend reversals on which to make profitable trades.
When it comes to analyzing potential binary options trades the stochastic indicator generally has a set value in the up side of 80 and a set value on the down side of 20. The indicator consists of two lines; one represents what is often referred to as the fast stochastic and the other line is often referred to as the slow stochastic. It is the intersection of these two lines that are of particular interest to a trader.
These intersections or crossing of the lines are then analyzed to see if the asset that is being tracked is currently in an oversold or undersold range. Based on which of these the asset is in, it is then considered a good time to place a put or call option on that asset.
One of the key considerations in making a profitable trade is the time frame that the indicator is plotted for. This holds true because more often than not the successful trade largely depends on determining an accurate expiration date. As a result of this, it is not logical to use a 5 minute chart to make a determination and then place your option on a daily or weekly expiration date. So it is extremely important to take note of this and follow this general rule on a consistent basis.
As you can see, a stochastic indicator can be very useful when it comes to making trades which are based on identifying a trend reversal.
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References and Further Reading:
1. Exchange-traded Fund (ETF) Investing: What You Need to Know (H Domash – 2011)
4. Introduction to Foreign Exchange Trading (J Chen – 2009)
5. Trading stock lost in a forex maze (T Frost – 2004)
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