The support and resistance levels are truly important in trading. The art of recognizing and then drawing them is something every trader should comprehend. But the thing is, they will not tell you a lot when used alone. You will have to add some kind of indicator to get a clear view of the best trade entry points.
In this guide, I want to offer you an overview of the Stochastic Oscillator that will work perfectly together with the support/resistance levels.
The cooperation of the support/resistance and the Stochastic oscillator
When you are analyzing the price of any asset, you will soon notice that there are areas, where the price fluctuates in a certain range. It seems that the price doesn’t go beyond. These are called support and resistance levels. At some point, the price will break through them just to return into the range later on. If you want to read more, check our guide about drawing and using support/resistance lines.
The question you are probably asking now is how to know when the prices are going to break out the support/resistance levels and how far they can go before returning into the range.
The easiest way to get the answer is to use additional indicators like for example the Stochastic oscillator.
Setting up the Stochastic oscillator on the Olymp Trade platform
After you log into your Olymp Trade account and choose the Japanese candlesticks chart, click on the indicators feature. The new window will pop up on the left side. You will find the Stochastic indicator among oscillators. Select it and it will appear at the bottom of the Olymp Trade interface.
You can change the %K and %D period, color, and width. The oversold and overbought areas are set for 20 and 80.
How to trade with the Stochastic oscillator alongside the support/resistance levels
The Stochastic oscillator consists of two lines, the %K line with default period 14 and the %D with the period of 3. They run between two horizontal lines with the value 20 and 80. Those two lines show the oversold and overbought areas, as was mentioned earlier.
Now, you have to observe two things. One is when the lines of the Stochastic indicator intersect and the other is their behavior about the oversold and overbought levels.
When the Stochastic oscillator exceeds the oversold level and then the %K line crosses the %D line from beneath, you should place a buy trade.
When the Stochastic indicator is moving above the overbought level and then the period K line crosses the %D line from above, it is a signal to open a sell trade.
Trading a long position at Olymp Trade
You can trade on the ranging market with the use of the support/resistance levels. But identifying the moment when the price breaks out these levels is simpler with the help from the Stochastic oscillator.
Furthermore, you must use the Japanese candlesticks chart.
Now the time to open a long position is when the %K line cuts the %D line from below the oversold line. It is shown in the above picture. There are two successful trades, that were placed based on the signals provided from the Stochastic oscillator and the support line.
Pros and Cons 📊
- 😃 Enhances the effectiveness of support and resistance levels in trading
- 😃 Identifies potential trade entry points with higher accuracy
- 😃 Can be used in various market conditions
- 😞 Requires proper understanding and practice to use effectively
- 😞 May generate false signals occasionally
- 😞 No guarantee of success in every trade
|Stochastic Oscillator Features
|Helps identify oversold and overbought conditions
|Enables traders to make more informed decisions and avoid entering trades at unfavorable times
|Works well with support and resistance levels
|Provides added confirmation for trade entry points, increasing the potential for successful trades
|Applicable to various timeframes and markets
|Versatile indicator that can be adapted to suit individual trading styles and preferences
Trading a short position at Olymp Trade
When the %K line cuts the %D line from above and next, both lines move below the overbought level, enter a sell position.
The most important thing in trading is to know the perfect moment to enter the position. When you are using the Stochastic oscillator together with the support/resistance levels, you can open long-lasting positions whenever the indicator’s lines cut the oversold or overbought levels. Your positions should last shorter when the Stochastic lines run within the period lines.
I presented to you how to trade with the Stochastic oscillator and the support/resistance levels. Now it is your turn to take action and try this strategy on your Olymp Trade account. As always, I recommend trading on the demo account for a while, before shifting onto the real one. Leave your comments below.
All the best!
- Q: How do I set up the Stochastic Oscillator on my trading platform?
- A: Typically, you can find the Stochastic Oscillator under the “indicators” or “oscillators” menu in your trading platform. Once selected, it should appear at the bottom of your chart.
- Q: What are the default settings for the Stochastic Oscillator?
- A: The default settings are %K period of 14, %D period of 3, oversold level at 20, and overbought level at 80.
- Q: How can I improve the accuracy of the Stochastic Oscillator?
- A: Use it in conjunction with other technical analysis tools, such as support and resistance levels, to confirm potential trade entry points.
- Q: Can the Stochastic Oscillator be used for both short and long positions?
- A: Yes, the Stochastic Oscillator can be used to identify potential entry points for both short and long positions based on its readings and the crossing of %K and %D lines.
- Q: How long should I practice using the Stochastic Oscillator before trading with real money?
- A: It’s recommended to practice on a demo account until you feel comfortable and consistently successful using the Stochastic Oscillator alongside support and resistance levels. The duration may vary depending on the individual trader’s learning pace and experience.
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