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Technical Analysis, Studies, Indicators:
RSI (Relative Strength Index)
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Studies
The Stochastic RSI indicator was developed by Tushard Chande
and Stanley Kroll. It applies the Relative Strength Index (RSI) to the
Stochastics formula, thus generating an oscillator that fluctuates between 0 and
1.
The RSI compares the magnitude of recent gains to the
magnitude of recent declines; the results are presented within a range of 0 and
100. The RSI is calculated by means of the following formula:
RSI = 100 - 100/(1 + RS)
Stochastics is a momentum indicator that tracks an equitys
current close relative to its high / low range over a given number of periods.
Stochastics is calculated using the following formula:Stochastics = 100 * (Recent Close - Low(n)) /
(High(n) - Low(n))
By inserting RSI in the Stochastics formula, the Stochastics
RSI formula becomes:
Stochastics = (RSI(n) - Lowest RSI(n)) /
(Highest RSI(n) - Lowest RSI(n))
Where:
- n is a number
of periods used in the calculations;
- RSI(n) is the
Relative Strength Index for n periods;
- Lowest RSI(n)
is the lowest RSI(n) within the n periods;
- Highest RSI(n)
is the highest RSI(n) within the n periods.
Stochastic RSI measures the value of RSI relative to its high
/ low range over a set number of periods.
- When the RSI
records a new low for a given period, Stochastic RSI will be at 0. Moves to
0 are considered very weak.
- When the RSI
records a new high for a given period, Stochastic RSI will be at 1. Moves to
1 are considered very strong.
A Stochastic RSI reading of 0.2 indicates that the current RSI
is 20% above the lowest level noted in the analyzed period, or 80% below the
highest level. Such a reading might be considered to indicate an oversold
market; the reading could thus be interpreted as a buy signal. On the other
hand, a Stochastic RSI reading of 0.8 shows that the current RSI is 80% above
the lowest level of the period, or 20% below its highest level. Such a reading
could be interpreted as indicating an overbought market and could be used as a
buy sell signal.
As with many price oscillators, Stochastic RSI can become
overbought (or oversold) and remain that way for a prolonged time. If the
indicator stays above 0.8 for an extended period of time, it could indicate a
strong uptrend. Conversely, a quick move below 0.20 could then indicate the
beginning of a strong downtrend. Furthermore, we recommended that you use other
technical indicators to confirm the overbought/oversold levels indicated by the
Stochastic RSI.
Many traders complement their volume indicators with price
indicators. These help to confirm situations where for instance the Stochastic
RSI indicates overbought/oversold levels, or where it indicates a strong uptrend
/ strong downtrend:
- When Stochastic
RSI readings above 0.8 are accompanied by volume surges, the indicator
readings could be used as a sell signal; however, if the readings are not
accompanied by volume surges, they could simply be ignored;
- When Stochastic
RSI readings below 0.2 are accompanied by volume surges, the indicator
readings could be used as a buy signal; however, if the readings are not
supported by volume surges, they could simply be ignored.
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