# Stochastics RSI

## Stochastics RSI

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Description: popular indicators used in many trading system. technical analysis and charting of lagging indicators.

The Stochastic RSI indicator was developed by Tushard Chande and Stanley Kroll. It applies the Relative Strength Index (RSI) to the Stochastics formula, thus generating an oscillator that fluctuates between 0 and 1.

The RSI compares the magnitude of recent gains to the magnitude of recent declines; the results are presented within a range of 0 and 100. The RSI is calculated by means of the following formula:

RSI = 100 - 100/(1 + RS)

Stochastics is a momentum indicator that tracks an equities current close relative to its high / low range over a given number of periods. Stochastics is calculated using the following formula:

Stochastics = 100 * (Recent Close - Low(n)) / (High(n) - Low(n))

By inserting RSI in the Stochastics formula, the Stochastics RSI formula becomes:

Stochastics = (RSI(n) - Lowest RSI(n)) / (Highest RSI(n) - Lowest RSI(n))

Where:

• n is a number of periods used in the calculations;
• RSI(n) is the Relative Strength Index for n periods;
• Lowest RSI(n) is the lowest RSI(n) within the n periods;
• Highest RSI(n) is the highest RSI(n) within the n periods.

Stochastic RSI measures the value of RSI relative to its high / low range over a set number of periods.

• When the RSI records a new low for a given period, Stochastic RSI will be at 0. Moves to 0 are considered very weak.
• When the RSI records a new high for a given period, Stochastic RSI will be at 1. Moves to 1 are considered very strong.

A Stochastic RSI reading of 0.2 indicates that the current RSI is 20% above the lowest level noted in the analyzed period, or 80% below the highest level. Such a reading might be considered to indicate an oversold market; the reading could thus be interpreted as a buy signal. On the other hand, a Stochastic RSI reading of 0.8 shows that the current RSI is 80% above the lowest level of the period, or 20% below its highest level. Such a reading could be interpreted as indicating an overbought market and could be used as a buy sell signal.

As with many price oscillators, Stochastic RSI can become overbought (or oversold) and remain that way for a prolonged time. If the indicator stays above 0.80 for an extended period of time, it could indicate a strong uptrend. Conversely, a quick move below 0.20 could then indicate the beginning of a strong downtrend. Furthermore, we recommended that you use other technical indicators to confirm the overbought/oversold levels indicated by the Stochastic RSI.

Many traders complement their volume indicators with price indicators. These help to confirm situations where for instance the Stochastic RSI indicates overbought/oversold levels, or where it indicates a strong uptrend / strong downtrend:

• When Stochastic RSI readings above 0.8 are accompanied by volume surges, the indicator readings could be used as a sell signal; however, if the readings are not accompanied by volume surges, they could simply be ignored;
• When Stochastic RSI readings below 0.2 are accompanied by volume surges, the indicator readings could be used as a buy signal; however, if the readings are not supported by volume surges, they could simply be ignored.
V. K.

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