Stochastic RSI

#momentum #oscillator #overboughtoversold 

Inventor: Tushar Chande and Stanley Kroll

Period 1: 5

Period 2: 5

Average Period: 3

Both stochastics and RSI are very popular indicators among traders and investors.

Stochastic RSI is a combination of these popular indicators. It uses stochastics calculations on RSI and plots it below the chart.

When the Stochastics RSI indicator is plotted, two lines appear below the chart.

1 – Green line is %K line

2 – The red line is the %D line

An indicator on an indicator: it applies the Stochastic formula to RSI values instead of price. It shows where RSI sits inside its own recent high-low range, on a 0 to 1 (or 0-100) scale. This makes it far more sensitive than RSI – it reaches overbought and oversold much more often, giving more signals in markets where plain RSI stays flat in the middle.

Above 0.80 indicates RSI at the top of its recent range, overbought. Below 0.20 indicates RSI at the bottom of its range, oversold. 

Useful readings: 

Above 0.80: Overbought, pullback risk 

Below 0.20: Oversold, bounce likely 

%K crosses above %D below 0.20: Momentum turning up from oversold 

%K crosses below %D above 0.80: Momentum turning down from overbought 

Stays pinned above 0.80: Very strong uptrend, do not short it blindly 

Far more signals than RSI, which means more noise too; always use a trend filter 

Best in range markets or for timing entries within a known trend 

Objective rules: 

Bullish: %K crosses above %D while both are below 0.20. 

Bearish: %K crosses below %D while both are above 0.80. 

Trend filter: In an uptrend (price above 200 SMA) take only the bullish crosses; in a downtrend only the bearish crosses 

Long exit: %K crosses above 0.80 and then turns down 

Chop protection: Skip signals if the last three crosses all failed to travel 0.30 or more 

What makes it unique: 

It is an indicator of an indicator, measuring RSI against its own range rather than price. This double layer makes it reach extremes that plain RSI touches only rarely. 

The indicator table value in TradePoint & RZone also provides you with a list of all values of this indicator for any group of stocks. This will allow you to compare the readings of this indicator across different stocks.

This indicator is also available in the System Builder of RZone & TradePoint for all charting methods. Using the system builder, you can develop various strategies based on the different conditions already present in this indicator. Additionally, it can be used with other indicators or price patterns to develop effective trading strategies. For any group of stocks and market segments, you can scan and backtest stocks based on those strategies.

The indicator is applicable to all types of charting. Calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin ashi charts, and lines on Kagi charts. While the formula and reading of the indicators remain the same, they become more dynamic on these charts.