DETAILED INFORMATION ON STOCHASTIC RSI
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The STOCHASTIC RSI is developed by Tushar Chande and Stanley Kroll, that measures the level of RSI relative to its high-low range over a set time period. StochRSI applies the Stochastic formula to RSI values, instead of price values. This makes it an indicator of an indicator. The result is an oscillator that fluctuates between 0 and 1.
The technical indicators already there to show over bought and oversold levels, the two developed StochRSI to improve sensitivity and generate a greater number of signals than traditional indicators.
The indicator measures where the RSIís 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 THE STOCHASTIC RSI WORKS
A trader might consider buying when the Stochastic RSI crosses above the Oversold Line (20).
A trader might consider selling when the Stochastic RSI crosses below the Overbought Line (80).
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 prices make a new high or low that isn't confirmed by the StochRSI, this divergence can signal a price reversal.
StochRSI is an indicator of an indicator, which makes it the second derivative of price. This means it is two steps removed from the price of the underlying security. Price has undergone two changes to become StochRSI. Changing prices to RSI is one change. Converting RSI to the Stochastic Oscillator is the second change. The end product of StochRSI looks much different than the original.
In short-term trend as a bound oscillator, the centerline is at .50. StochRSI reflects an uptrend when consistently above .50 and a downtrend when consistently below .50. Because this indicator is quite volatile, some smoothing with a moving average can help for short-term trend identification.
StochRSI is like RSI on steroids. RSI produces relatively fewer signals and StochRSI dramatically increases the signal count. There will be more overbought/oversold readings, more centerline crosses, more good signals and more bad signals.
The StochRSI should also be used in conjunction with other indicators or chart patterns to maximize effectiveness, especially given the high number of signals that it generates. Non-momentum oscillators, such as the AD Line, may be particularly helps because they don't overlap in terms of performance and provide additional insights.
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