Pathshala: Stochastic RSI

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<h4 class="sectionedit2" id="introduction" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Introduction</span></h4>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5WDIQFasUDlUIMIMRFNL3y-SDgXo0mboIzAMwF-PCFIMFyV7t4WganJOvYyNmHpHz2zuU3Gi4rYz4fEUBn7LbSdaaUqnyUIq0nxHYt76cWjLZ2q_uyl3jxYIRfK0eHJrcGwnzSBKzMMI/s1600/rrm_power_clip_image018.gif" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="388" data-original-width="584" height="132" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5WDIQFasUDlUIMIMRFNL3y-SDgXo0mboIzAMwF-PCFIMFyV7t4WganJOvYyNmHpHz2zuU3Gi4rYz4fEUBn7LbSdaaUqnyUIq0nxHYt76cWjLZ2q_uyl3jxYIRfK0eHJrcGwnzSBKzMMI/s200/rrm_power_clip_image018.gif" width="200" /></a>
Developed by Tushar Chande and Stanley Kroll, StochRSI is an oscillator that measures the level of RSI
 relative to its high-low range over a set time period. StochRSI applies
 the Stochastics formula to RSI values, instead of price values. This 
makes it an indicator of an indicator. The result is an oscillator that 
fluctuates between 0 and 1.
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In their 1994 book, <i>The New Technical Trader</i>, Chande and Kroll 
explain that RSI can oscillate between 80 and 20 for extended periods 
without reaching extreme levels. Notice that 80 and 20 are used for 
overbought and oversold instead of the more traditional 70 and 30. 
Traders looking to enter a stock based on an overbought or oversold 
reading in RSI might find themselves continuously on the sidelines. 
Chande and Kroll developed StochRSI to increase sensitivity and generate
 more overbought/oversold signals.
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<h4 class="sectionedit3" id="calculation" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Calculation</span></h4>
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<pre class="code"><span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;">StochRSI = (RSI - Lowest Low RSI) / (Highest High RSI - Lowest Low RSI)
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<span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;">
StochRSI measures the value of RSI relative to its high/low range over a
 set number of periods. The number of periods used to calculate StochRSI
 is transferred to RSI in the formula. For example, 14-day StochRSI 
would use the current value of 14-day RSI and the 14-day high-low range 
for 14-day RSI. 
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<span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;"> 14-day StochRSI equals 0 when RSI is at its lowest point for 14 days. </span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;"> 14-day StochRSI equals 1 when RSI is at its highest point for 14 days. </span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;"> 14-day StochRSI equals .5 when RSI is in the middle of its 14-day high-low range.</span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;"> 14-day StochRSI equals .2 when RSI is near the low of its 14-day high-low range.</span></span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Courier New",Courier,monospace;"><span style="font-family: Arial,Helvetica,sans-serif;"> 14-day StochRSI equals .80 when RSI is near the high of its 14-day high-low range.</span></span></span></div>
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<h4 class="sectionedit4" id="interpretation" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Interpretation</span></h4>
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It is important to remember that StochRSI is an indicator of an 
indicator, which makes it the second derivative of price. This means it 
is two steps (formulas) removed from the price of the underlying 
security. Price has undergone two changes to become StochRSI. Converting
 prices to RSI is one change. Converting RSI to the Stochastic 
Oscillator is the second change. This is why the end product (StochRSI) 
looks much different than the original (price). </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRboBFaQi_oD3Pq9RSBvgW4F2zLs2fxKmVCclq0xlgySoS_Zq6fLkXCU-kJHEZSY24NX8USHI-zJ6o2Tg-jvXqQgX6PrtRUmLSa5TRvWakOEXbCEZZqTGxETmAzmp2kLzW2B67AFebEYQ/s1600/StochRSI+1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="651" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRboBFaQi_oD3Pq9RSBvgW4F2zLs2fxKmVCclq0xlgySoS_Zq6fLkXCU-kJHEZSY24NX8USHI-zJ6o2Tg-jvXqQgX6PrtRUmLSa5TRvWakOEXbCEZZqTGxETmAzmp2kLzW2B67AFebEYQ/s1600/StochRSI+1.png" /></a></span></div>
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StochRSI has characteristics similar to most bound momentum oscillators.
 First, it can be used to identify overbought or oversold conditions. A 
move above .80 is considered overbought, while a move below .20 is 
considered oversold. Second, it can be used to identify the short-term 
trend. As a bound oscillator, the centerline is at .50. StochRSI 
reflects an uptrend when consistently above .50 and a downtrend when 
consistently below .50. Because this indicator is quite volatile, some 
smoothing with a moving average can help for short-term trend 
identification. 
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<h3 class="sectionedit5" id="overbought_oversold" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Overbought/Oversold</span></h3>
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Trend identification is the key to successfully choosing between 
overbought and oversold levels. It is important to look for oversold 
conditions when the bigger trend is up and overbought conditions when 
the bigger trend is down. In other words, look for trades in the 
direction of the bigger trend. 14-day StochRSI would be considered a 
short-term indicator. Therefore, it is important to identify the 
medium-term trend when looking for overbought and oversold conditions. 
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Chart 2 shows Boeing in a medium-term uptrend with StochRSI(14) becoming
 oversold in January and February. First, the medium-term was deemed up 
because the 10-day SMA was above the 60-day SMA. With an uptrend in 
place, oversold conditions were preferred to overbought conditions. 
StochRSI became oversold at least four times from December to February. 
For what it is worth, 14-day RSI did not become oversold during this 
timeframe because it is less sensitive. Oversold is not the same as 
bullish though. It serves as a warning to watch for a bounce. A catalyst
 is still needed to solidify the low and signal an actual upturn. In 
this example, chartists could look for prices to break above the 10-day 
SMA or for StochRSI to break above .50, its centerline. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiee4N4vveaAPEv6DTCmwAnK5gj_9dUrlCNjrULDqSIgFEe3Vz_vdWDeKgiqstKcRRdQmfjHvyvMC9Ou7J0YTNW37zvSG37AqSniivU-h8LCNTLqyUPd2INgnjRf0Mw3EcFUEpjb_NAClw/s1600/StochRSI+2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="429" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiee4N4vveaAPEv6DTCmwAnK5gj_9dUrlCNjrULDqSIgFEe3Vz_vdWDeKgiqstKcRRdQmfjHvyvMC9Ou7J0YTNW37zvSG37AqSniivU-h8LCNTLqyUPd2INgnjRf0Mw3EcFUEpjb_NAClw/s1600/StochRSI+2.png" /></a></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Chart 3 shows Flour Corp (FLR) within a downtrend and StochRSI 
registering overbought readings. First, the medium-term trend is down 
because the 10-day SMA is below the 60-day SMA. This means oversold 
readings are ignored and overbought readings become the focus. StochRSI 
moved above .80 in mid-October and early November (red arrows). These 
overbought readings suggested that the oversold bounce could end soon. 
Confirmation came when StochRSI moved back below .50 (red dotted lines).
 Chartists could also look for the stock to break back below its 10-day 
SMA to signal a short-term downturn. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5Dk_V2qH4fGbuO7P-eobUIPxoTQ3v6PHWQrAwUe_HSWffyZC-sr2BsCmXn0Ut-qOPcZ5FbSPKSYuLC1HMS3QNhKGG15ibR5LkDfSImkCJm5Z6dxZeDxTxeFb231Y4x9eXHimzXiPcB2Y/s1600/StochRSI+3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="429" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5Dk_V2qH4fGbuO7P-eobUIPxoTQ3v6PHWQrAwUe_HSWffyZC-sr2BsCmXn0Ut-qOPcZ5FbSPKSYuLC1HMS3QNhKGG15ibR5LkDfSImkCJm5Z6dxZeDxTxeFb231Y4x9eXHimzXiPcB2Y/s1600/StochRSI+3.png" /></a></span></div>
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<h3 class="sectionedit6" id="trend_identification" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Trend Identification</span></h3>
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StochRSI is quite a volatile oscillator that frequently becomes 
overbought and oversold. For short-term trend identification, it can 
help to lengthen the calculation period and apply a short moving average
 to smooth the data. Momentum favors rising prices when the 10-day SMA 
of StochRSI is above .50 and falling prices when below .50. Chart 4 
shows Chevron (CVX) with 20-day StochRSI and a 5-day SMA of the 
indicator. The 5-day SMA moved above .50 in mid-February just after the 
stock gapped higher. The gap and moving average cross above .50 were 
short-term bullish signals. A falling flag/wedge formed in late 
February. Notice how CVX found support in the gap zone. The uptrend 
continued with a flag/wedge breakout and the stock advanced above 80. 
Even though StochRSI dipped below .50 in late March, the 5-day SMA held 
above .50 to keep the uptrend alive until late April. This short-term 
signal turned into a two-month uptrend. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmvZ5etirfcbbM02q3EtLtbzbp5ltahcXUUyEganAduiryo8XwkJMjOmbr4uEdSaQWo70b1avYm7cXmMex-G7entZRp3LlytWD9tf9QDa3FhJoukogdnZe_zezhUpyBHBq4rMd1BDnA00/s1600/StochRSI+4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="429" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmvZ5etirfcbbM02q3EtLtbzbp5ltahcXUUyEganAduiryo8XwkJMjOmbr4uEdSaQWo70b1avYm7cXmMex-G7entZRp3LlytWD9tf9QDa3FhJoukogdnZe_zezhUpyBHBq4rMd1BDnA00/s1600/StochRSI+4.png" /></a></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Unfortunately, not all signals are this picture perfect. There will be 
whipsaws, even when using a 5-day SMA with 20-day StochRSI. For example,
 a consolidation during a trend can cause the 5-day SMA of StochRSI to 
gyrate above/below the .50 line before continuing or reversing the 
trend. Chart 5 shows Yahoo! with 20-day StochRSI and its 5-day SMA for 
smoothing. The moving average broke above .50 in mid-February to turn 
momentum bullish. This was followed by a resistance breakout for Yahoo! 
on the first day of March. As the stock consolidated with a falling 
channel in late March, the 5-day SMA for StochRSI(20) dipped below .50 
twice (red oval). These dips proved short-lived as the stock broke 
channel resistance and StochRSI moved above .80 to show strength. The 
trend did not end until the 5-day SMA moved below .50 AND Yahoo! gapped 
down. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpMl1byB2cI_O4a6h0KLQ95tTEeu9WNCP06gum-1OGnRInFbDClEAzvnGDb2n2J-Y04HdYjqtwinRAZAMsdwUb6yW71udH2Ah0jbFxc86YSnmTLA9rKeYu2HzTK-xlh8fngLcasmvptio/s1600/StochRSI+5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="429" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpMl1byB2cI_O4a6h0KLQ95tTEeu9WNCP06gum-1OGnRInFbDClEAzvnGDb2n2J-Y04HdYjqtwinRAZAMsdwUb6yW71udH2Ah0jbFxc86YSnmTLA9rKeYu2HzTK-xlh8fngLcasmvptio/s1600/StochRSI+5.png" /></a></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Chart 6 shows Yahoo! with a bearish signal from StochRSI that did not 
take hold right away. The 5-day SMA for 20-day StochRSI moved below .50 
to turn momentum bearish the second week of October. Yahoo! broke 
support for confirmation, but this break did not hold as the stock 
surged to 18 a few days later. The immediate recovery and bounce back 
above 17 formed a bear trap. Even though Yahoo! surged, the 5-day SMA 
for StochRSI remained below .50 and momentum did not confirm. The 
subsequent gap above 17.50 turned out to be an exhaustion gap as Yahoo! 
failed at resistance (18), filled the gap, broke support again and moved
 sharply lower into November. Talk about volatility. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEV4H-y0IvwtcYH-3aveybw35buhcudwoiowFzYnEDZYxLWZmHbFi7OQhBf2cuN6muh6ljA1t3Pfve20ngfbD1j9zUcJzWlfnKTth236fYUorZhhT7DFL0_X0VU6teq0nhg-6cq3sIWJc/s1600/StochRSI+6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="429" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEV4H-y0IvwtcYH-3aveybw35buhcudwoiowFzYnEDZYxLWZmHbFi7OQhBf2cuN6muh6ljA1t3Pfve20ngfbD1j9zUcJzWlfnKTth236fYUorZhhT7DFL0_X0VU6teq0nhg-6cq3sIWJc/s1600/StochRSI+6.png" /></a></span></div>
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<h3 class="sectionedit7" id="conclusion" style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Conclusion</span></h3>
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StochRSI is like RSI on steroids. RSI produces relatively fewer signals 
and StochRSI dramatically increases the signal count. There will be more
 overbought/oversold readings, more centerline crosses, more good 
signals and more bad signals. Speed comes at a price. This means it is 
important to use StochRSI with other aspects of technical analysis for 
confirmation. The examples above use gaps, support/resistance breaks, 
and price patterns to confirm StochRSI signals. Chartists can also 
employ other complementary indicators, such as On Balance Volume (OBV) 
or the Accumulation Distribution Line. These volume-based indicators do 
not overlap with momentum oscillators. Chartists should also experiment 
with various settings and learn the nuances of StochRSI before using it 
in the real world. 
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Introduction Developed by Tushar Chande and Stanley Kroll, StochRSI is an oscillator that measures the level of RSI relative to its...