Stochastic
Definition
The Stochastic (stochastic oscillator) is an indicator that shows where price closed relative to the range between the high and the low of a chosen period, on a scale from 0 to 100. It consists of a fast %K line and a smoothed %D line. Above 80 is overbought, below 20 is oversold, and a crossover of the lines inside an extreme zone is a pullback signal. In binary options it is combined with a level or a trend indicator, and the entry is made at the open of the next candle.
How the Stochastic is calculated
The indicator answers one question: where did the last candle close relative to the whole price range of the period. The %K line formula: (close − period low) ÷ (period high − period low) × 100. The %D line is a simple moving average of %K, usually over three candles.
An example on the 1-minute EUR/USD chart with a period of 14: the high of the last 14 candles is 1.0950, the low 1.0900, and the last candle closed at 1.0940. %K = (1.0940 − 1.0900) ÷ (1.0950 − 1.0900) × 100 = 80. Price closed at the upper edge of the range, the indicator is on the overbought band. If the next candle closes at 1.0905, %K drops to 10: price has gone to the lower edge, and the oscillator shows it at once, without lag.
| Parameter | Standard | Fast | In the blog's breakdowns |
|---|---|---|---|
| %K period | 14 | 5 | 14 |
| %K smoothing | 3 | 3 | 3 |
| %D period | 3 | 3 | 3 |
| Upper band | 80 | 80 | 70 (SuperTrend + Stochastic) |
| Lower band | 20 | 20 | 30 |
How to read the lines and zones
| Situation | What it means | Trade in binary options |
|---|---|---|
| %K and %D above 80 | overbought | wait for a cross down at resistance |
| %K and %D below 20 | oversold | wait for a cross up at support |
| %K crosses %D from above in the upper zone | a pullback down begins | down at the open of the next candle |
| %K crosses %D from below in the lower zone | a pullback up begins | up at the open of the next candle |
| lines in the middle of the scale | neutral | no signal |
| lines "stuck" to a band | a strong move with the trend | no entries against the move |
The signal comes not from the reading but from the exit from the zone and the crossover. While both lines sit above 80, buyers are still in control: price can print new highs while the indicator presses against the ceiling for several candles in a row.
How to trade it in binary options
- Direction. A trend filter: the SuperTrend line, a moving average or the higher timeframe. In a range both directions are taken, in a trend only corrections with it.
- Place. Price has come to a level: the dynamic SuperTrend line, support or resistance, a Bollinger band.
- Zone. The Stochastic is in the extreme zone against the current move: oversold on an approach to support, overbought at resistance.
- Confirmation. The lines crossed, or %K came back out of the zone into the channel. Entry at the open of the next candle, expiration of one to three candles.
- Limit. One recovery per asset, then the situation is left alone.
The Stochastic in the terminal
In BinoView Supercharts the indicator is called Stochastic Oscillator and is added from the catalog: the settings hold the %K and %D periods, slowing, smoothing type, line thickness and the values of the 80 and 20 bands. The Stoch Levels Overlay indicator moves the zones right onto the candles, and the Stoch BB Reversal bot opens trades when the Stochastic leaves a zone at a Bollinger band. Manual combinations are covered in the SuperTrend + Stochastic and Bollinger Bands + Stochastic + EMA 50 posts.
How it differs from RSI
RSI measures the speed and magnitude of price change over the period; the Stochastic measures the position of the close inside the range. So the Stochastic is faster: it reacts to every candle and reaches the bands first, but it also gives more false crossovers. RSI is smoother and more resistant to noise, but it lags. Many keep both: RSI for the overall momentum picture, the Stochastic for the entry moment.
Frequently asked questions
Which Stochastic settings should I use for binary options?
The standard 14, 3, 3: the %K period, the %K smoothing and the %D period. It suits M1–M5 and gives a moderate number of signals. The fast variant 5, 3, 3 reacts earlier but is wrong more often on noise. The 80 and 20 bands can be narrowed to 70 and 30, as in the SuperTrend + Stochastic strategy, so the signal arrives a candle earlier.
What does a crossover of %K and %D mean?
%K is the fast line, %D is its moving average. When %K crosses %D from below in the oversold zone, the move down has run out and a pullback up begins. A crossover from above in the overbought zone is the mirror signal. A crossover in the middle of the scale, outside the zones, carries no weight.
Is the Stochastic better than RSI?
Not better, faster. The Stochastic measures the position of the close within the range, so it reacts to every candle and gives more signals, false ones included. RSI measures the speed of price change and moves more smoothly. On short expirations the Stochastic is usually used for the entry moment, and RSI or a moving average for the direction.