Stochastic RSI
Last updated
Last updated
The Stochastic RSI (Stoch RSI) indicator was developed by Tushard Chande and Stanley Kroll. They introduced this indicator in their 1994 book 'The New Technical Trader'. The Stochastic RSI indicator was designed to increase the sensitivity and reliability of the common RSI indicator, which provides trading signals by displaying the overbought/oversold state. Tushard Chande and Stanley Kroll explain that the common RSI indicator trades between 20 and 80 levels quite often for long periods without ever reaching the oversold/overbought area that gives many traders good trading opportunities. Therefore, they decided to combine the RSI with the Stochastic indicator and got a new one that provides better and more distinctive trading signals.
Trading using oversold/overbought levels of the Stochastic RSI indicator:
When StochRSI leaves the oversold zone (below 20) to a higher level, it is a buy signal;
When StochRSI goes out of the overbought zone (above 80) to a lower level, it is a signal to sell.
Please note that unlike the RSI, where the 30 and 70 levels were used as oversold/overbought zones, here the levels 20 and 80 are used, just like for the Stochastic indicator.
RSI period – time period to be used in calculating the RSI;
RSI mode – method of calculating the RS parameter, Simple or Exponential;
RSI source – Determines what data from each bar will be used in calculations. Close is the default;
Stochastic period – time period to be used in calculating the Stochastic;
%K – time period to be used in calculating the %K. 3 is the default value;
%D – percent of deviation between price and the average of previous prices (Momentum). The time period to be used in calculating the %D. 3 is the default value;
Smoothing type – Simple, Exponential, Modified, or Linear weighted.
The indicator itself looks as follows on the chart:
