The Stochastic RSI Indicator was established to get the benefit of both momentum indicators. The objective behind this was to create a more sensitive indicator which also considers the historical performance of stock rather than a general analysis of price change. Apart from recognizing the overbought/oversold conditions, the Stochastic RSI also helps in identifying short-term trends. 

In This Article 

What is Stochastic RSI?

How to analyse a chart using Stochastic RSI? 

Category – Trend/Momentum

Type – Leading

What is Stochastic RSI? 

The Stochastic RSI (StochRSI) is an indicator of an indicator. It measures the strength and weakness of the relative strength indicator (RSI) over a time period. StochRSI derives its values from the RSI. A stochastic oscillator is made use of at the set of RSI values. Thus it’s based on price. 

The Stochastic formula compares the stock’s closing price to its price range which helps in forecasting price turning points. This helps in understanding whether the RSI values are overbought or oversold. 

Calculation of Stochastic RSI

The formula of StochRSI is as under:- 

StochRSI = (RSI-Lowest RSI)/ (Max RSI-Lowest RSI) 

Where 

RSI= Current RSI reading 

Lower RSI = Minimum RSI reading over last 14 oscillations 

Max RSI = Maximum RSI reading over the last 14 periods 

The StochRSI conclude its values from RSI readings. RSI has an input value which is 14 and it provides the number of data periods that are to be included in the calculation. The RSI values are then made use in the StochRSI formula. 

Follow the below-mentioned steps to calculate the Stochastic RSI:- 

Note the RSI level for 14-day intervals. 

Make note of the readings of the current RSI, the lowest RSI and the highest RSI on the 14th period. 

Now on the 15th period note down current, lowest and highest RSI readings and calculate new StochRSI from this. 

At the end of each period, calculate new StochRSI by using only the last 14 RSI values. 

How to analyse a chart using Stochastic RSI?

As per the StochRSI if you are trading stocks and if something is trading upwards then the closing price tends to be near the intraday high. Whereas if something is trading downwards then the closing price tends to be close to the intraday low. 

RSI helps to measure the size of the latest price changes to assess if something is overbought or oversold. 

The indicator measures a value between 0 and 100. If the indicator is showing a value below 20 then it is an indication of an oversold condition. This means that the stock is trading at bottom of its range. 

If the indicator is showing a value above 80 it is in an overbought condition. This reflects that the stock is trading at the top of its range. 

StochRSI is not just used to identify trading opportunities but can also be used to forecast short-term trends. Traders can determine price reversals and price turns by using an oscillator at the midpoint i.e. the 50 mark. If the indicator is above mark 50 then the trend is moving upwards and if it is not moving then it indicates that trend is moving down.  

Source:- https://currency.com/how-to-read-and-use-the-stochastic-rsi-indicator