Stochastic RSI - Indicator Explained

What is the Stochastic Relative Strength Index?

The Stochastic RSI or Stoch RSI indicator is basically an indicator of an indicator. It’s employed in technical analysis to give the RSI indicator a stochastic calculation. It is a measure of RSI in relation to its own high/low range over a user-defined time period. The Stochastic RSI is a line-plotting oscillator that calculates a value between 0 and 1 and plots it. This indicator is most commonly used to spot overbought and oversold circumstances.

The StochRSI oscillator was created to combine the strengths of both momentum indicators to create a more sensitive indicator that is more sensitive to a given security’s previous performance rather than a broad examination of price change.

Tushar Chande and Stanley Kroll created the Stochastic RSI (Stoch RSI) indicator. In their book The New Technical Trader, published in 1994, they introduced their indicator.

The Stochastic RSI (StochRSI) equations are as follows:

StochRSI = (Current RSI – Lowest RSI)/(Highest RSI – Lowest RSI)

Where, Lowest RSI = Lowest RSI reading over the last 14 periods

(or your preferred lookback period)

Highest RSI = Highest RSI reading over the last 14 periods

(or your preferred lookback period)

How to compute the Stochastic RSI?

The StochRSI is calculated using RSI data. The RSI has an input value, usually 14, that tells the indicator how many data periods it is using in its calculation. The StochRSI formula then employs these RSI levels.

  1. Keep track of the RSI readings for 14 sessions.
  2. Pay attention to the current RSI reading, the highest RSI reading, and the lowest RSI reading on the 14th period. All of the equation variables for StochRSI can now be filled in.
  3. Note the current RSI reading, highest RSI reading, and lowest reading for the 15th period, but only for the previous 14 periods (not the last 15). Determine the new StochRSI.
  4. As each period closes, compute the new StochRSI value using only the previous 14 RSI data.

How to use StochRSI?

Near the upper and lower limits of its range, the StochRSI indicator takes on the most relevance. As a result, the indicator’s principal function is to detect potential entry and exit positions, as well as price reversals. As a result, a value of 0.2 or lower indicates that an asset is likely oversold, whilst a value of 0.8 or above indicates that it is likely overbought.

Furthermore, readings that are closer to the centerline can provide valuable information on market movements. When the centerline works as a support and the StochRSI lines move firmly above the 0.5 level, for example, it could indicate the continuation of a bullish or rising trend – especially if the lines begin to advance toward 0.8. A downward or bearish trend is indicated by values regularly below 0.5 and heading toward 0.2.

Constraints of using the Stochastic RSI

A shortcoming of StochRSI is that it is highly volatile, changing quickly from high to low. In this respect, smoothing the StochRSI can help. Some traders take a moving StochRSI average to minimize the volatility and increase the usefulness of that indicator. In contrast, a 10-day StochRSI simple moveable average can give a significantly smoother and reliable indication. Most graphical platforms can be used without any specific calculations to apply one type of indicator for another.

Furthermore, the StochRSI is an output of two steps distant from the actual price of the asset under consideration, which implies it may be out of sync with an asset’s market price in real-time at instances.

Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.

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