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Saturday, July 14, 2012

Stochastic RSI


Stochastic RSI was developed to increase sensitivity and reliability of the regular RSI indicator when it comes to trading off overbought/oversold RSI levels.

The authors of the Stochastic RSI indicator - Tushard Chande and Stanley Kroll - explain that often regular RSI indicator would trade in between 20 and 80 levels for extended periods of times without ever reaching an oversold/overbought areas where many traders seek trading opportunities.

When combining RSI with Stochastic, a new indicator - Stochastic RSI - provides better and more distinctive signals to trade upon.
Let's compare regular RSI and Stochastic with their new improved version - Stochastic RSI:

As we can see, unlike other indicators Stochastic RSI was able to reach overbought/oversold levels all the time and even remain there longer before moving in the opposite direction.

How to trade with Stochastic RSI

When trading with Stochastic RSI traders look for the following signals:
1. Trading with Stochastic RSI oversold/overbought levels:
When StochRSI exits from oversold (below 20) level up - Buy.
When StochRSI exits from overbought (above 80) level down - Sell.
Notice, that unlike with RSI, where we used 30 and 70 levels as oversold/overbought, here we use 20 and 80, same as for Stochastic indicator.

Another point to notice is that we react to indicator signals only after d% line (the thin brown line on the screen shot) has reached overbought/oversold levels as well. If, this line has never entered the overbought/oversold area, any signals to Buy/Sell as StochRSI exits 20 or 80 should be temporarily ignored.
2. Crossover of the center line of StochRSI suggest a current trend.
Above 50 level - the trend is up.
Below 50 level - the trend is down.
These are the two most effective ways to trade with Stoch RSI, the rest, such as divergence trading, for example, would be less effective with this indicator opposed to regular Stochastic and MACD

Stochastic RSI formula

Stochastic RSI = ((Today's RSI - Lowest RSI Low in %K Periods) / (Highest RSI High in %K Periods - Lowest RSI Low in %K Periods)) * 100

Stochastic RSI measures the value of RSI in relation to its High and Low range over the required period:
when a regular RSI reaches a a new Low for the period, Stochastic RSI will be at 0. When RSI records a new high for the period, Stochastic RSI will be at 100.

Settings for Stochastic RSI & Stochastic Basic 

For StochRSI.mq4 it is:

For StochRSI_basic.mq4 it is: