StocRSI

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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 charting platforms) and is created by applying the Stochastic oscillator formula to a set of relative strength index (RSI) values rather than to 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 in order to create a more sensitive indicator that is attuned to a specific security’s historical performance rather than a generalized analysis of price change.

Key Takeaways

  • A StochRSI reading above 0.8 is considered overbought, while a reading below 0.2 is considered oversold. On the zero to 100 scale, above 80 is overbought, and below 20 is oversold.
  • Overbought doesn’t necessarily mean the price will reverse lower, just like oversold doesn’t mean the price will reverse higher. Rather the overbought and oversold conditions simply alert traders that the RSI is near the extremes of its recent readings.
  • A reading of zero means the RSI is at its lowest level in 14 periods (or whatever lookback period is chosen). A reading of 1 (or 100) means the RSI is at the highest level in the last 14 periods.
  • Other StochRSI values show where the RSI is relative to a high or low.

The Formulas For the Stochastic RSI (StochRSI) are:

RSI = Current RSI reading;

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

Highest RSI = Highest RSI reading over last 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, which tells the indicator how many periods of data it is using in its calculation. These RSI levels are then used in the StochRSI formula.

  1. Record RSI levels for 14 periods.
  2. On the 14th period, note the current RSI reading, the highest RSI reading, and lowest RSI reading. It is now possible to fill in all the formula variables for StochRSI.
  3. On the 15th period, note the current RSI reading, highest RSI reading, and lowest reading, but only for the last 14 period (not the last 15). Compute the new StochRSI.
  4. As each period ends compute the new StochRSI value, only using 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 developed StochRSI to improve sensitivity and generate a greater number of signals than traditional indicators could do.

The StochRSI deems something to be oversold when the value drops below 0.20, meaning the RSI value is trading at the lower end of its predefined range, and that the short-term direction of the underlying security may be nearing a low a possible move higher. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme highs and could be used to signal a pullback in the underlying security.

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

In addition, non-momentum oscillators like the accumulation distribution line may be particularly helpful because they don’t 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 seem similar, but the StochRSI relies on a different formula from 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 key differences is how quickly the indicators move. StochRSI moves very quickly from overbought to oversold, or vice versa, while the RSI is a much slower moving indicator. One isn’t better than the other, StochRSI just moves more (and more quickly) than the RSI.

Limitations of Using the Stochastic RSI

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

Also, the StochRSI is 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 at times it may be out of sync with an asset’s market price in real time.

StochRSI

  • Technical indicators
  • Technical indicators

Description

The Stochastic RSI indicator, developed by Tushard Chande and Stanley Kroll, is an oscillator that uses RSI values, instead of price values, as inputs in the Stochastic formula. The indicator measures where the RSI’s current value is relative to its high/low range for the specified period.

Like RSI, StochRSI cycles between overbought levels above 80 and oversold levels below 20. The StochRSI reaches these levels much more frequently than RSI, resulting in an oscillator that offers more trading opportunities. StochRSI moves within the range of 0 to 100. Unlike RSI, StochRSI frequently reaches the extreme 0 and 100 levels.

How this indicator works

  • Overbought and Oversold signals: A buy signal would be generated when StochRSI advances from oversold (below 20) to above 20. Conversely, a sell signal would be generated when StochRSI declines from overbought (above 80) to below 80.
    Note: As with many oscillators, StochRSI can become overbought (or oversold) and remain overbought (or oversold) for an extended period.
  • Crosses of the 50 level can be used as a buying or selling signal. When StochRSI crosses above 50 then buy, when StochRSI crosses below 50 then sell.
  • If underlying prices make a new high or low that isn’t confirmed by the StochRSI, this divergence can signal a price reversal.

Calculation

StochRSI = [(Current RSI – Lowest Low RSI Value in n periods) / (Highest High RSI Value in n periods – Lowest Low RSI Value in n periods)] x 100

The RSI, developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements.

The Slow Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods.

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

StocRSI

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StocRSI

by Steven Sommer, 2129 days ago

Country: All

Market: All

The StocRSI indicator is a hybrid indicator that employs a 21 day fast stochastic indicator , 14 day RSI, adds half the value of each and takes a 13 day EMA of the summed value to arrive at the final calculation. It was developed and employed by Don Beasley who is a professional money manager and currently a pricipal at Trademark Capital in Athens, GA.

The idea is to identify assets that are trending up in value (StocRSI > 50) and purchase then and hold these assets until they cease to trend (StocRSI 65).

Looking at the plot of the indicator and the underlying asset, one might be well served to apply a moving average to serve as a “signal line” and hold the underlying asset when the StocRSI > the “signal line” moving average. This would hold the underlying asset while it is trending up and sell the asset when it was trending down. On might hold the asset when the StocRSI > 65. You may want to apply some sort of smoothing to StocRSI prior to creating the “signal line”.

The plot of the standard function is a bit mundane and you can spice it up a bit:

Plot multicolor line with Green = Stoc > 50
plot(StocRSI, ‘StocRSI(21,14,13)’, colorRed, ChartLine, StyleSymbolNone);
UpdateColor(StocRSI > 50, colorGreen);
plot(50, ‘Threshold’, colorBlack, chartLine, StyleSymbolNone);

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Type: Trading Indicator

Object ID: 1485

Market: All


Style:
Technical Analysis

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