Building a reliable binary trading strategy can be a difficult task. When it comes to spotting profitable movements in the market, one of the best way to do so is to rely on overbought and oversold indicators. These indicators allow you to build a strong strategy based on price action and should give you clear signals.
In this article we’re going to see how you can profit from overbought or oversold areas in binary trading by using the simple Stochastic Oscillator indicator, which you can find for free on most charting platforms.
Setting up your charts for this strategy is going to be easy. We strongly recommend you trade this strategy on 1-hour expiries, and look at 5-minute charts on your platform. We also recommend you use this strategy on forex pairs, as we’ll noticed the best results from these. You may use it with other assets (and expiries) of course, but the results might not be as good.
Set up your charting software to show an M5 chart of the asset you wish to trade, and plot the Stochastic Oscillator on there. You may use the default settings for the Stochastic Oscillator (8,3,3), along with the simple moving average.
With an overbought/oversold strategy, we’re looking for the oscillator to show movement back out from either sides. These are the best times to place your binary trades following the market trend. Don’t forget to always know which way the market is trending before starting to trade.
The image above should help you visualize the setup easily.
The GBPUSD is in a clear downtrend. We are therefore looking to buy it as soon as an opportunity rises. Once the oscillator shows reading above 80, we’ll jump in with a position.
First pattern – Around 17:05 the price of the GBPUSD is finally getting below its overbought area, meaning it’s moving below the 80 line. We therefore take a PUT position with a 1-hour expiry on this asset in our binary platform.
Second pattern – Around 21:35 we see a similar setup in GBPUSD. The chart shows that the oscillator is going back below the 80 line once again, and we obviously purchase a PUT contract which will expire at the end of the next hour.
As you can see, we’ve only provided you with PUT trade examples. The principles used in these examples work perfectly in the exact opposite situations, with CALL trades. You would simply have to look for opportunities where the oscillator is moving out from under the 20 line to above it before purchasing a CALL contract on the hourly expiry.
This strategy may seem very simple, because it is, but more things come into play. Like we’ve seen in the setup section, make sure you always know the direction of the trend. If you need to, plot a few helping indicators (EMAs for example) on your charts just to make sure you know exactly what you’re doing.