What is the Stochastic RSI?
The Stochastic RSI indicator (Stoch RSI) is essentially an indicator of an indicator. It is used in technical analysis to provide a stochastic calculation to the RSI indicator.
This means that it is a measure of RSI relative to its own high/low range over a user defined period of time.
The Stochastic RSI is an oscillator that calculates a value between 0 and 1 which is then plotted as a line. This indicator is primarily used for identifying overbought and oversold conditions.
The Stochastic RSI (Stoch RSI) indicator was developed by Tushard Chande and Stanley Kroll. They introduced their indicator in their 1994 book The New Technical Trader.
In this example, a very common 14 Period Stoch RSI is used.
Stoch RSI = (RSI — Lowest Low RSI) / (Highest High RSI — Lowest Low RSI)
Here are some approximate benchmark levels:
- 14 Day Stoch RSI = 1 when RSI is at its highest level in 14 Days.
- 14 Day Stoch RSI = .8 when RSI is near the high of its 14 Day high/low range.
- 14 Day Stoch RSI = .5 when RSI is in the middle of its 14 Day high/low range.
- 14 Day Stoch RSI = .2 when RSI is near the low of its 14 Day high/low range.
- 14 Day Stoch RSI = 0 when RSI is at its lowest level in 14 Days.
It is important to remember that the Stoch RSI is an indicator of an indicator making it two steps away from price. RSI is one step away from price and therefore a stochastic calculation of the RSI is two steps away. This is important because as with any indicator that is multiple steps away from price, Stoch RSI can have brief disconnects from actual price movement. That being said, as a range bound indicator, the Stoch RSI’s primary function is identifying crossovers as well as overbought and oversold conditions.
What to look for?