There are a lot of risks associated when you use stochastic crossovers for trading. Using stochastic crossovers as a trading strategy is a risky undertaking. Stochastic is a popular trading tool but it is best used in conjunction with other indicators and not as a strategy all its own. As a trading strategy stochastic by itself leaves much to be desired but when incorporated with other tools in the trader’s toolbox can be an effective means of determining trend, entry points, support and resistance.
What Is Stochastic?
Stochastic is an oscillator tool similar to MACD and RSI. These tools measure market movement in a number of ways but all are focused on strength of direction over time. Oscillators usually move in a range that can be over and under 0 or between 0 and 100 as in the case of stochastic. As a stock moves upward the oscillator will move upward, trending in a fashion that mimics the movement of the underlying stock. Typically, oscillators can move within the range to positive and negative extremes in either bull or bear markets. What I mean is that an oscillator may retreat to a bearish extreme in a bull market or climb to a bullish extreme in a bear market. These moves to extreme levels are not signals of reversal but potential entry points in the underlying trend.
There are two primary methods for using stochastics crossovers in binary options. The first is when the %D line moves to an extreme, reverses, and then crosses back out of the extreme range. This is supposedly a sign of strength in a bull market and a sign of weakness in a bear market. A bullish crossover would be when %D moves below the bearish extreme and then crosses back over and the reverse in a bear market.
Binary Options Stochastic Crossover Signals
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.
How to use Stochastic Crossover ?
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.
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.
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.
The Bottom line
Stochastic crossovers are a good thing, especially when used in conjunction with other tools and techniques. Generally, stochastic crossovers are great especially when you use it together with other techniques and tools. I never rely solely on any one indicator or technique and like using stochastic. I will be keeping this weapon in my arsenal. There are other uses for stochastic as well that I will be exploring in future articles.
Chart Courtesy: Daily FX