June 13, 2019

Indicator Mashup: The Stochastic RSI

June 13, 2019
|
4 minutes

The Stochastic RSI is an oscillating technical indicator ranging between zero and one or zero and 100. It is created by applying 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 is meant to take advantage 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.


The following is the formula for the Stochastic RSI:



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


When ranging between zero and one, a reading above 0.8 is generally considered overbought while a reading below 0.2 is generally considered 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 is usually considered overbought and 20 or below is usually considered oversold.

Overbought Level



If the Stochastic RSI is considered oversold, this could suggest that the short-term direction of the underlying asset may reverse and move higher soon, and vice versa if the Stochastic RSI is considered overbought.


Oversold Level


Like other bound oscillators, the Stochastic RSI has a midline which is 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, it suggests a downtrend.

Uptrend


Because the Stochastic RSI is a more sensitive, and thus volatile, momentum oscillator, it generates 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, the volatility of the Stochastic RSI can be smoothed to make it more useful. This is done by taking the moving average of the technical indicator. For example, a 10-day simple moving average of the Stochastic RSI can produce more stable readings.


Though the Stochastic RSI seems similar to the RSI, it is important to know that they rely on different formulas. Another differentiating feature is the fact that the RSI moves more slowly than the Stochastic RSI. Finally, while the RSI is a derivative of price, the Stochastic RSI is 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.


If you want to use a customised Stochastic RSI in your trading strategies without having to watch it, automating with Capitalise is your best bet. Capitalise is the world’s first trading platform empowering you to automate your own, original strategies using plain English. You simply write your strategies into the Capitalise wizard in the form of If-then sentences and Capitalise monitors the market and executes your trades from start to finish. Plus, Capitalise integrates with TradingView charts, so you can see the Stochastic RSI for your asset of 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 customisable 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 is 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 that you’re one technical indicator stronger and know how to use that indicator on the Capitalise platform, why not put that power to good use? Just go to Capitalise and start typing.


Please note that the examples provided here are purely for the purposes of illustrating how to use the Stochastic RSI and are not in any way to be taken as trading advice. This content is intended for information and educational purposes only and should not be considered investment advice or investment recommendation. Past performance is not an indication of future results. Read more here

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