Guide for Using the Stochastic Oscillator to Trade Trend Reversals on IQ Option

A stochastic oscillator is a momentum indicator. It doesn’t follow the price or volume of the underlying asset. Its primary use is to signal an impending trend reversal when bullish and bearish divergences occur.

Setting up the Stochastic Oscillator on IQ Option

Log into your account and select the asset you want to trade on a Japanese candle stick chart. Then, on the indicators feature, click on “Popular” and then select Stochastic Oscillator.

The indicator’s settings are as follows:

Trading using the Stochastic Oscillator on IQ Option

The Stochastic Oscillator is a versatile trading tool that can be used in 2 ways.

Using a Stochastic Oscillator to identify overbought and oversold areas

As the Stochastic Oscillator crosses above the 80 lines, the markets are said to be oversold. But note what happens when the indicator is still above the 80. If the %k cuts the %d and starts moving under it, it’s a signal of an imminent trend reversal. This is the time to enter a long sell position.

On the other hand, when the Stochastic cuts below the oversold line, observe where the %k cuts and moves above the %d. This is a signal that an uptrend is imminent. This is the best place to enter into a long buy position.

Using Stochastic Oscillator divergence to trade on IQ Option

Divergence occurs when the price and the indicator aren’t moving in the same direction. Remember the Stochastic Oscillator doesn’t follow price so this is completely normal.

So what does this all mean? Divergence is usually accompanied by a support/resistance break on the price chart. This means that a new trend and very likely in the opposite direction will occur soon.

The Stochastic Oscillator is one of the best tools to use to identify a possible trend reversal. It takes time to learn how to read and use this indicator. Luckily, you can do so on the IQ Option practice account. Open one for free and start trading using this indicator.

Good luck!