What Does the Stochastic RSI Help You with?


This article is a continuation of the introduction blog written on the Stochastic RSI. The StochRSI was developed by Tushar S. Chande and Stanley Kroll and comprehensive in their book "The New Technical Trader," first published in 1994. While technical pointers already existed to show overbought and oversold levels, the two developed StochRSI to improve sensitivity and generate a greater number of signals than traditional pointers could do.


The StochRSI deems something to be oversold when the value drops below 0.20, meaning the RSI value is trading at the lower end of its predefined range, and that the short-term direction of the underlying security may be nearing a low a possible move higher. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme highs and could be used to signal a pullback in the underlying security.

Along with identifying overbought/oversold conditions, the StochRSI can be used to identify short-term trends by looking at it in the context of an oscillator with a centerline at 0.50. When the StochRSI is above 0.50, the security may be seen as trending higher and vice versa when it's below 0.50.

The StochRSI should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness, especially given the high number of signals that it generates. In addition, non-momentum oscillators like the accumulation distribution line may be particularly helpful because they don't overlap in terms of functionality and provide insights from a different perspective.

The Difference Between the Stochastic RSI and the Relative Strength Index (RSI)
They seem similar, but the StochRSI relies on a different formula from what generates RSI values. RSI is a derivative of price. Meanwhile, stochRSI is derivative of RSI itself, or a second derivative of price. One of the key differences is how quickly the indicators move. StochRSI moves very quickly from overbought to oversold, or vice versa, while the RSI is a much slower moving indicator. One isn't better than the other, StochRSI just moves more (and more quickly) than the RSI.

Limitations of Using the Stochastic RSI
One downside to using the StochRSI is that it tends to be quite volatile, rapidly moving from high to low. Smoothing the StochRSI may help in this regard. Some traders will take a moving average of the StochRSI to reduce the volatility and make the indicator more useful. For example, a 10-day simple moving average of the StochRSI can produce an indicator that's much smoother and more stable. Most charting platforms allow for applying one type of indicator to another without any personal calculations required.

Also, the StochRSI is the second derivative of price. In other words, its output is two steps away from the actual price of the asset being analyzed, which means at times it may be out of sync with an asset's market price in real time.


Comments

Post a Comment

Popular posts from this blog

Understanding Liquidity

Image
The concept of  liquidity   has many facades to it. One way to define liquidity is “the ability of an asset to be converted into cash readily on demand”. An additional way of viewing at it is when any asset can be bought or sold at its fair price. Liquidity thus means that there aren’t discounts or bonuses devoted to it during buy or sell and it’s easy to enter and exit the asset. It is believed as more of an item is accepted and sold, the chances of charging premiums or giving discounts lower and such an asset usually trades around ‘what it is worth’. The forex market is often defined as a liquid market with an average turnover of more than $5 trillion daily as of April 2016 according to the Bank for International Settlements (BIS) while real estate is a classic example of an illiquid asset. Property as an asset is less liquid, requiring huge investments into physical form, monotonous procedures and smaller market.  Liquidity is significant for any tradable  asset , wh
Read more

5 Places to Visit in Reykjavík

Image
The capital of Iceland is a young, culturally happening city, as well as a launch pad for natural wonders that people dream of seeing their whole lives. Like any cool spot Reykjavík is also constantly reinventing itself, as you can see at the Grandi Area by the Old Harbour. Here fish packing factories have been turned into sharply designed visitor attractions, while creative murals coat the walls and cutting-edge Nordic restaurants have opened. The waterfront was chosen for the cultural venue, Harpa, a monument for 21st-century Reykjavík with a mesmerising facade by Ólafur Elíasson. You could stay in Reykjavík’s cosy embrace or stride out to visit the volcanic marvels in the Golden Circle and see whales in the Faxa Bay in summer. Hallgrímskirkja: Both a parish church and Iceland’s national sanctuary, Hallgrímskirkja is an ever-present feature of Reykjavík’s skyline. Conceived in the early-1940s by Guðjón Samúelsson, the church was 41 years in the making and was finally con
Read more

Weekly News Overview: Cryptocurrency

Image
Email Extortion Scam Targets Googles AdSense A new extortion scam targeting website owners serving banner ads through Google’s AdSense program has begun circulating the Internet. The malevolent scheme demands Bitcoin (BTC) in exchange for preventing an attack, which would purportedly lead to the users’ AdSense account suspension. The email-based extortion scheme was reported by security news and investigation blog KrebsOnSecurity, on Feb. 17. The blog post detailed that some site owners received a message as their site had been spotted by the malicious program as one seeking revenue from publishing an ad. Coinbase Pitches Crypto As A Solution For Racial Discrimination To mark Black History Month, Coinbase has launched an advertising campaign with the pitch that cryptocurrencies can help tackle racial injustice in the financial sector. As part of the campaign, the exchange published a blog post on Feb. 13 with the results of a survey it conducted in
Read more