Stochastics Divergence Binary Options Trading Strategy
The stochastics divergence binary trading strategy utilizes the stochastics.ex4 trading indicator.
This indicator functions like an oscillator and is able to detect oversold and overbought conditions.
It can also be used to trade divergences.
The strategy described today is the divergence strategy as is used in the binary options market.
MetaTrader 4 Indicators: stochastics.ex4 (default setting), Line tool (default setting)
Preferred Time Frame(s): 1-Minute, 5-Minute, 15-Minutes, 30-Minutes, 1-Hour, 4-Hours
Recommended Trading Sessions: Any time the signal appears
Currency Pairs: any
Trade Example (Click the image for full size)
The strategy is to look for when the indicator starts to diverge from the price action.
Usually the price action will eventually correct itself in the direction of the divergence.
The key is to identify the divergence and this is done by using the line tool to trace the highs and lows of both price and indicator.
This indicator and strategy can be used in Forex and binary options.
Now with binary options, there has to be precision when it comes to making entries. Even a single pip matters.
So where a trader may get away with an improperly placed entry in forex, that action can prove very costly in binary options. So our emphasis on this strategy is precision in trade entry.
So how is this achieved? The line tool is our best friend here.
Apart from connecting highs and lows to pinpoint divergence areas, the tracing of the trend lines on the charts gives the trader a sound basis for support and resistance entry.
The entry is made based on price rejection at a trend line and subsequent pullback by the following candle (the entry candle).
So we have the trend line, the signal candle and the entry candle forming the basis for precise trade entries that do not carelessly give away pips to the market.
CALL ENTRY RULES
A CALL trade setup occurs when the trade spots the following scenarios on the charts:
- The indicator line is forming higher lows when price is forming lower lows. This is the divergence that signals the trade opportunity.
- Look out for the signal candle, which is a candle which touches or cuts the price trend line but does not close below it.
- The next candle is the entry candle. This candle should attempt to break below the trend line but will usually bounce off it. At the exact point of contact with the trend line, initiate the CALL trade using the bounce point as the entry price.
The trade is expected to last two candles, terminating at the closing price of the candle which follows the entry candle. The time frame will determine the duration of the trade. For this example shown above, the chart is an hourly chart and so two candles is equal to an expiry time of 2 hours.
For a one hour chart, the early closure can be initiated with 15 minutes to go in the trade. If the trade is profitable, it can be closed with a reduced payout.
PUT ENTRY RULES
The following events signify how a PUT entry can be made:
- Price forms higher highs while indicator forms lower highs. This is a bearish divergence opportunity.
- Look out for the signal candle, which is a candle which touches or cuts the price trend line but does not close above it.
- The next candle is the entry candle. This candle should attempt to break above the trend line but will usually be rejected by it. At the exact point of contact with the trend line, initiate the PUT trade using the bounce point as the entry price.
The chart above also shows the PUT trade examples.
Expiry and Early Closure
The same principles as for the CALL trade apply
About The Trading Indicators
The Stochastics indicator is an oscillator which can point out divergence signals as well as price extreme points. Reliance on this indicator however requires the trader to know how to apply the line tool to spot the divergence areas.
The line tool must be applied accurately. Once this is done, it makes it easy to trade with the Stochastics divergence opportunity.