What Is Stochastic RSI?
Stochastic RSI, aka StochRSI, is a technical analysis indicator that combines the concepts of the Stochastic Oscillator and the Relative Strength Index (RSI). It is used to identify market trends as well as to indicate whether a crypto asset is overbought or oversold.
What You Need To Know About Stochastic RSI
Stochastic RSI was invented in 1994 by Stanley Kroll and Tushar Schonder with the goal of increasing the sensitivity of the regular RSI indicator. It is calculated as follows:
Stoch RSI = (Current RSI – Lowest RSI)/(Highest RSI – Lowest RSI)
Thus, StochRSI uses the Stochastic Oscillator formula on RSI values instead of price data, which results in a numerical value between 0 and 1 that moves above and below a centerline of 0.5. Some Stochastic RSI versions multiply the results by 100, which means that the values range between 0 and 100 instead and the centerline at 50.
A reading of 0.8 or above suggests an overbought condition, while a reading of 0.2 or below, indicates that an asset is likely oversold. Readings near the centerline may also provide insights into the crypto market trends.
For instance, if the centerline acts as a support and the StochRSI lines consistently move above the 0.5 mark, it may indicate a continuation of a bullish trend, particularly if the lines stay closer to 0.8. Conversely, readings moving steadily below 0.5 and trending toward 0.2 signal a bearish trend.
Note that a 3-day simple moving average (SMA) is commonly used as a signal line along with the Stochastic RSI to decrease the risk of trading on false signals.
Similar to standard RSI, the usual time frame used for Stochastic RSI is 14 periods. This means that if you apply the indicator to a daily chart, the calculation will generate new data based on the past 14 days. When applied to an hourly chart, it will only consider the past 14 hours.
