The Highs and Lows of the Stochastic RSI

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Disclaimer

The examples presented in this article are only to be regarded as a technical demonstration when used with the trading system. Accordingly, these examples should not in any way be construed as a recommendation for any type of trading strategy and they do not constitute any form of advice as to the advisability of investing by the use of any trading strategy. Any Investor who uses a trading strategy must build a trading strategy on the basis of independent testing and according to their specific requirements and needs.

The Highs and Lows of the Stochastic Relative Strength Index (RSI) comes from that this oscillating technical indicator ranges between determining whether an asset qualifies as overbought or oversold. The Stochastic RSI combines the  Stochastic Oscillator formula to a set of RSI values calculated based on an asset’s price.

Developed by Tushar S. Chande and Stanley Kroll and published in their 1994 book titled “The New Technical Trader,” the Stochastic RSI takes advantage of the strengths of both the RSI and Stochastic Oscillator. Combined, they create an indicator that is more sensitive to an asset’s historical performance than price change.

How is the Stochastic RSI Calculated?

The following  formula calculates the Stochastic RSI:

Where RSI is the current RSI value, min [RSI] indicates the lowest RSI value over the last chosen number of periods (often 14), and max [RSI] indicates the highest RSI value over the same previous chosen number of periods.

When ranging between zero and one, a reading above 0.8  generally indicates an asset as overbought while a reading below 0.2 generally indicates an asset as oversold. If the charting or trading platform you use produces a Stochastic RSI ranging from zero to 100 then a reading of 80 or above indicates overbought conditions and 20 or below oversold.

Overbought Level

If the Stochastic RSI implies an oversold condition, this could suggest that the short-term direction of the underlying asset may reverse and move higher soon. Of course, vice versa movements may be expected if the Stochastic RSI implies an overbought condition.

Oversold Level

Like other bound oscillators, the Stochastic RSI ‘s midline rests at either at 0.5 or 50, depending on the range. When consistently above the midline, the Stochastic RSI suggests an uptrend and when consistently below the midline, the score suggests a downtrend.

Uptrend

How Does the Stochastic RSI Differ from Other Indicators?

Because the Stochastic RSI provides a more sensitive and thus volatile momentum oscillator by generating more signals than other traditional indicators. Therefore, some analysts recommend using it in conjunction with other indicators or chart patterns to help traders see the bigger picture.

Also, smoothing out the volatility of the Stochastic RSI  make it more useful for some trading. Taking the moving average of the technical indicator, for example, a 10-day simple moving average of the Stochastic RSI produces more stable readings than unadulterated scores.

What’s the Main Difference Between the Stochastic RSI and a regular RSI?

Though the Stochastic RSI seems similar to the RSI, important distinctions derive from them relying on different formulas. Another differentiating feature is the fact that the RSI moves more slowly than the Stochastic RSI. Finally, while the RSI indicates a derivative of price, the Stochastic RSI serves as a derivative of the RSI, and therefore a second derivative of price. Due to its greater distance from price points, the Stochastic RSI may be out of sync with an asset’s real-time market price.

Automating Your Stochastic RSI Strategies

If you want to use a customized Stochastic RSI in your trading strategies without having to constantly monitor it, automate your strategy with Capitalise. Capitalise.ai delivers the world’s first trading platform empowering you to automate your own  strategies using plain English. Simply write your strategies into the Capitalise wizard in the form of If-then sentences. Capitalise monitors the market and executes your trades from start to finish. Plus, Capitalise integrates with TradingView charts. The Stochastic RSI applies to the asset of your choice as you write and implement your strategy.

The following is an example of how to use the Stochastic RSI to condition a strategy on the Capitalise platform:

Once you type “Stochastic RSI” into the wizard, a dialog box that looks like this will pop up:

The customizable fields shown above represent the following:

Stoch_NumOfBars: the number of bars considered for the Stochastic RSI value

D: the number of Stochastic RSI values used to calculate %D (their simple moving average)

Smooth: the type of Stochastic RSI (fast or slow)

BarPeriod: the length of time each bar used to calculate the Stochastic RSI value stands for. It can range between 1 minute and 1 month although typically set to 1 day.

RSI_NumOfBars: the number of bars considered for the RSI values used to calculate the Stochastic RSI

RSI_BarPrice: the bar price (open, close, low, or high) considered for the RSI values used to calculate the Stochastic RSI

Now you possess one more powerful technical indicator for your trading toolbox. Back-test and simulate some Stochastic RSI strategies on the Capitalise platform.  Gain some experience and confidence before trading live. Just go to the Capitalise wizard and start typing.

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