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Stochastic RSI Oscillator

Introduced by Tuschar Chande and Stanley Kroll in their December, 1992 Stocks and Commodities article entitled, “Stochastic RSI and Dynamic Momentum Index”, the Stochastic RSI Oscillator attempts to combine ideas from two indicators - the Relative Strength Index (RSI) and the Stochastic Oscillator. As its name implies, the Stochastic RSI Oscillator is the RSI run through the stochastic algorithm. The Stochastic RSI Oscillator is a momentum indicator designed to show the relation of the current RSI value relative to its high/low range over a given number of periods using a scale of 0-100.

The Stochastic RSI Oscillator, much like the other stochastic oscillators, is typically plotted as 2 lines: the StochRSI line and %D. The StochRSI is the main (fast) line and %D is the signal (slow) line.

The Stochastic RSI Oscillator is calculated by the formula:

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

Slowing StochRSI = 3-period moving average of StochRSI; using a 1-period moving average of StochRSI eliminates this slowing (or smoothing) of the StochRSI

%D = 3-period moving average of Slowing StochRSI

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Interpretation

There are three basic techniques for using the Stochastic RSI Oscillator to generate trading signals.

Crossovers: 1) StochRSI / %D line Crossover: A buy signal occurs When the StochRSI crosses above the %D line and a sell signal occurs when the StochRSI crosses below the %D line. 2) StochRSI / 50-level Crossover: When the StochRSI crosses above 50 a buy signal is given. Alternatively, when the StochRSI crosses below 50 a sell signal is given.

Divergence: Looking for divergences between the Stochastic RSI Oscillator and price can prove to be very effective in identifying potential reversal points in price movement. Trade long on Classic Bullish Divergence: Lower lows in price and higher lows in the Stochastic RSI Oscillator; Trade short on Classic Bearish Divergence: Higher highs in price and lower highs in the Stochastic RSI Oscillator.

Overbought/Oversold Conditions: The Stochastic RSI Oscillator can be used to identify potential overbought and oversold conditions in price movements. An Overbought condition is generally described as the Stochastic RSI Oscillator being greater than or equal to the 80% level while an oversold condition is generally described as the Stochastic Oscillator being less than or equal to the 20% level. Trades can be generated when the Stochastic RSI Oscillator crosses these levels. A buy signal occurs when the Stochastic RSI Oscillator declines below 20% and then rises above that level. A sell signal occurs when the Stochastic RSI Oscillator rises above 80% and then declines below that level.

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