Stochastic Trading

BO304 Lesson – Learn how to use a Stochastic trading system when trading binary options – Video & Transcript

Welcome to Binary Options 304– Stochastic Oscillator. This is the fourth video in our Binary Options 300 series brought to you by binaryoptions.education.

This video is slightly different from previous videos in the sense that I’ve come straight to a price chart. The reason for this, I thought best to give you a hands-on demonstration of the stochastic indicator rather than going through some slides. So this is the Australian dollar-US dollar. It’s a four hour chart, and down the bottom here, I have the stochastic. The stochastic is set at the default settings of 14, 3, 1. If you– below the stochastic indicator onto your price chart, it’s probably set to those settings already as this is the default setting, 14, 3, and 1. If it’s not, you can soon change it to that default setting.

Now how the stochastic indicator works is we have a gauge to the right here from the naught to 100. When the stochastic lines are above 80, so above this purple channel, that is a signal that markets are overbought. So the indicator signals overbought markets. It also signals oversold markets when these lines fall below the purple channel, which is below 20 on the gauge. So here we have overbought conditions, and down here we have oversold conditions. We’re currently in oversold. We have oversold here, overbought, and oversold.

Now why it’s important that the stochastic signals overbought and oversold markets, if a market is overbought, it can fall on the downside. If a market is oversold, it can go on the upside. Now I’m going to demonstrate how to trade with a stochastic indicator on this Australian dollar–US dollar price chart. It’s a four hour chart, and we’re going to use a bit of multiple time frame analysis also. As even though we are analyzing the four-hour charts, I will be zooming in to the one-hour chart to actually place the binary option position.

So what we’re going to do is look for overbought and oversold conditions, and then we’re going to look for a bearish candle on the four-hour charts to confirm with the stochastic. So if the stochastic is showing overbought, then we’re looking for bearish engulfing candles. If the stochastic is showing oversold, we’re looking for bullish engulfing candles. So let just start here where the stochastic is clearly showing overbought markets. So here to here.

So let’s look at this price data on our charts, on the four-hour charts. We have a bearish engulfing here. This is exactly what we are looking for. It’s on the 8th of April, and it closed at 1 o’clock. So we’re now going to go to the one-hour chart, and we’re going to look for either a bearish pin bar or bearish engulfing. It’s the 8th of April, 1 o’clock, so right here. This candle closed here while the four-hour candle closed right here. We have a doji.

We could’ve taken that, but ideally I’m looking for bearish pin bars or bearish engulfing candles, and that’s the signal we’re looking for there. Bearish engulfing. Price goes on the downside. So we’re looking to trade an hour expiry. We could have placed a put there and made a win. Nice easy win.

Let’s go back to the four-hour chart. Let’s go back to the area of overbought markets. So we’ve had one bearish engulfing, which is here. We have another here. Slightly engulfing. See them in a bit. You’ll see that it’s engulfing candle. So that’s the 9th of April, the day after, and that closed at 1 o’clock also. So let’s go to our hourly charts. 9th of April, 1 o’clock. OK. So the candle closed here. And straightaway we have this bearish engulfing. We could have placed a put there. And you’ll notice that price, only ever so slightly, but price fell on the downside. So we would’ve placed our put here, price went on the downside and we’ve made another win.

Let’s go back to the four-hour charts. See if there are anymore signals. OK, we have another bearish engulfing here. Is the stochastic still showing overbought? I believe it is. Yep, overbought. So let’s go to our one-hour charts. This was the 10th of April, and once again finished at 1 o’clock. Three days about 1 o’clock. 10th of April, 1 o’clock. OK, so the candle finished here. We have a bearish pin bar. It’s not most obvious pin bar, but there’s a pin bar there. So we could have placed the put, and price came on the downside. If we miss that and continue to wait, we have a bearish engulfing here. And then price fell on the downside. So either one of those signals would have led to a win.

So three days, all at 1 o’clock, and three wins. So here, here, and here, or here. Nice, easy training strategy. That’s how you use the stochastic. It signals overbought and oversold. Thank you for watching.