Stochastic RSI – StochRSI Definition

What is the Stochastic RSI?

The Stochastic RSI (StochRSI) is an indicator used in technical analysis that ranges between zero and one (or zero and 100 on some chart platforms) and is created by applying the Stochastic oscillator formula to a set of relative strength indices ( RSI) values ​​rather than standard price data. Using RSI values ​​within the Stochastic formula gives traders an idea of ​​whether the current RSI value is overbought or oversold.

The StochRSI oscillator was developed to take advantage of both momentum indicators to create a more sensitive indicator tuned to a specific security’s historical performance rather than a general analysis of price change.

The formulas for the Stochastic RSI (StochRSI) are:



StochRSI = RSI − min

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max

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− min

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where: RSI = Current RSI reading min

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= Lowest RSI reading over the last 14 periods (or your chosen lookback interval) max

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= Highest RSI reading over the last 14 periods \begin{aligned} &\text{StochRSI}=\frac{RSI-\min\left[{RSI} \right ]}{\max\left[{RSI} \right ] – \min\left[{RSI} \right ]}\\ &\textbf{where:}\\ &RSI = \text{Current RSI reading}\\ &\min\left[{RSI} \right ] = \text{Lowest RSI reading over the last 14 periods}\\ &\;\text{(or your chosen lookback interval)}\\ &\max\left[{RSI} \right ] = \text{Highest RSI reading over the last 14 periods}\\ &\;\text{(or your chosen lookback interval)} \end{align}

,StochRSI=max[RSI]−few[RSI]RSI−few[RSI],where:RSI=Current RSI readingfew[RSI]=Lowest RSI reading over the past 14 periods(or your chosen lookback interval)max[RSI]=Highest RSI reading over the past 14 periods,

Where:

RSI = Current RSI reading;

Lowest RSI = Lowest RSI reading over last 14 periods (or selected lookback period); and

Highest RSI = Highest RSI reading over the past 14 period (or lookback period).

How to calculate the Stochastic RSI

The StochRSI is based on RSI readings. The RSI has an input value, typically 14, that tells the indicator how many periods of data it uses in its calculation. These RSI levels are then used in the StochRSI formula.

Record RSI levels for 14 periods. On the 14th period, note the current RSI reading, the highest RSI reading and the lowest RSI reading. It is now possible to fill in all the formula variables for StochRSI. Note the current RSI reading, highest RSI reading and lowest reading on the 15th period, but only for the last 14 period (not the last 15). Calculate the new StochRSI. As each period ends, calculate the new StochRSI value using only the last 14 RSI values.

What does the Stochastic RSI tell you?

The StochRSI was developed by Tushar S. Chande and Stanley Kroll and detailed in their book “The New Technical Trader,” first published in 1994. While technical indicators already existed to show overbought and oversold levels, the two StochRSI developed to improve sensitivity and generate a greater number of signals than traditional indicators can do.

The StochRSI considers something oversold when the value falls below 0.20, which means that the RSI value is trading at the bottom of its predetermined range, and that the short-term direction of the underlying security may be approaching a low, a possible move higher . Conversely, a reading above 0.80 indicates that the RSI may be reaching extreme highs and can be used to signal a pullback in the underlying security.

Along with identifying overbought/oversold conditions, the StochRSI can be used to identify short-term trends by looking at them in the context of an oscillator centered at 0.50. When the StochRSI is above 0.50, the security can be seen as trending higher and vice versa when it is below 0.50.

The StochRSI should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness, especially given the high number of signals it generates.

In addition, non-momentum oscillators such as the accumulation spread line can be particularly useful because they do not overlap in terms of functionality and provide insights from a different perspective.

The difference between the Stochastic RSI and the Relative Strength Index (RSI)

They look similar, but the StochRSI relies on a different formula than what generates RSI values. RSI is a derivative of price. Meanwhile, StochRSI is derivative of RSI itself, or a second derivative of price. One of the main differences is how fast the indicators move. StochRSI moves very quickly from overbought to oversold, or vice versa, while the RSI is a much slower moving indicator. One is not better than the other, StochRSI just moves more (and faster) than the RSI.

Limitations of using the Stochastic RSI

One downside to using the StochRSI is that it tends to be quite volatile and move quickly from high to low. Smoothing the StochRSI can help in this regard. Some traders will take a moving average of the StochRSI to reduce volatility and make the indicator more useful. For example, a 10-day simple moving average of the StochRSI can produce an indicator that is much smoother and more stable. Most charting platforms allow one type of indicator to be applied to another without requiring any custom calculations.

The StochRSI is also the second derivative of price. In other words, its output is two steps away from the actual price of the asset being analyzed, which means that it sometimes cannot be synchronized with an asset’s market price in real time.