While both the relative strength index (RSI) and the stochastic oscillator measure momentum, they do so by analyzing different aspects of price change over time. The StochRSI oscillator was developed to take advantage of both momentum metrics and to create a more sensitive indicator that is attuned to a specific security's historical performance rather than a generalized analysis of price change.

The StochRSI is simply the stochastic oscillator calculation applied to a security's historical RSI data rather than price action. The most recent RSI reading is compared to the range of readings over a specified time frame. The result is an oscillator that reflects the current trend momentum compared to its past performance.

For example, assume there is a stock experiencing a strong bullish trend for several weeks, registering RSI readings between 45 and 90 for the past 14 sessions. The current reading is 52. The StochRSI calculation for this session would be (52 - 45) / (90 - 45), or 0.16. The StochRSI is a range-bound metric that fluctuates between 0 and 1, with readings above 0.8 indicating overbought conditions and readings under 0.2 indicating oversold conditions. A reading of 0.16, therefore, means that the current RSI is very close to the lowest RSI of the period. When looking at RSI alone, a reading of 52 signals almost stagnant momentum and would not warrant any trade entry until price began to move with more ambition one way or the other. The StochRSI reading makes it apparent that for this security an RSI of 52 is actually quite low, treading well into oversold territory, and an upswing may be imminent in keeping with the larger trend.

Due to the increased sensitivity of the StochRSI, this indicator is extremely volatile. While it does provide more overbought/oversold signals than other momentum oscillators, that means more actionable signals as well as more false signals. A prudent investor uses multiple indicators to pinpoint optimal trade entries rather than relying on the StochRSI alone.