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Oscillators > Stoch RSI

Article/Author: "Stochastic RSI and Dynamic Momentum Index" Tushare Chande and Stanley Kroll, Stocks&Commodities magazine, 05/1993

Category: Indicator > Oscillator


Developed by Tushard Chande and Stanley Kroll, StochRSI is an oscillator that measures the level of RSI relative to its range, over a set period of time. The indicator uses RSI as the foundation and applies to it the formula behind Stochastics. The result is an oscillator that fluctuates between 0 and 1.

In their 1994 book, The New Technical Trader, Chande and Kroll explain that RSI sometimes trades between 80 and 20 for extended periods without reaching overbought and oversold levels. Traders looking to enter a stock based on an overbought or oversold reading in RSI might find themselves continuously on the sidelines. To increase the sensitivity and provide a method for identifying overbought and oversold levels in RSI, Chande and Kroll developed StochRSI.

This indicator is calculated according to next formula:

(RSI(n) - RSI LowestLow(n)) / (RSI HighestHigh(n) - RSI Lowestlow(n)),

where n is number of periods used in calculation


Overbought and Oversold Crossovers - If an uptrend has been identified in the underlying security, then a buy signal would be generated when

StochRSI advances from oversold (below .20) to above .20. Conversely, if a downtrend has been identified, then a sell signal would be generated when

StochRSI declines from overbought (above .80) to below .80.

Centerline Crossovers - Some traders look for moves above or below .50 (the centerline) to confirm signals and reduce whipsaws. A move from oversold to above .50 could constitute a buy signal and would remain in place until a decline below .50. Conversely, a move from overbought to below .50 would could act as a sell signal that would remain in place until an advance back above .50.

Positive and Negative Divergences - A positive divergence followed by a confirming advance above .20 could constitute a buy signal and a negative divergence followed by a decline below .80 could act as a sell signal.

Failures - Chande and Kroll also note that moves back past the trigger lines would indicate a failed signal. An advance back above .80 would indicate a failed signal and traders would be advised to close positions.

Strong Trend - As with many oscillators, StochRSI can become overbought (or oversold) and remain overbought (or oversold) for an extended period.
A move above .80 may imply overbought, but it can also indicate a strong up trend and remain above .80 for a prolonged period. Conversely, a quick move below .20 could indicate the beginning of a strong downtrend. Moves to 1 are considered very strong and moves to 0 very weak


Price - data type to use
RSILen - number of periods
Length - number of bars to calculate STOCHRSI function

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