What Is the StochRSI?

The StochRSI is an indicator used in technical analysis that ranges between zero and one and is created by applying the Stochastic Oscillator formula to a set of Relative Strength Index (RSI) values rather than to standard price data. Using RSI values within the Stochastic formula gives traders an idea of whether the current RSI value is overbought or oversold – a measure that becomes specifically useful when the RSI value is confined between its signal levels of .20 and .80.

StochRSI Explained

The StochRSI was developed by Tushar S. Chande and Stanley Kroll and detailed in their book The New Technical Trader, which was first published in 1994. Chande was an engineer who developed an interest in trading systems; Kroll was a veteran futures trader and money manager. While technical indicators already existed to show overbought and oversold levels, the two developed StochRSI to improve sensitivity and generate a greater number of signals than traditional indicators could do.

The StochRSI is calculated using the following formula:

StochRSI = (RSI - Lowest Low RSI) / (Highest High RSI - Lowest Low RSI)

The StochRSI deems something to be oversold when the value drops below 0.20, meaning the RSI value is trading at the lower end of its predefined range, and that the short-term direction of the underlying security may be nearing a correction. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme levels and could be used to signal a pullback in the underlying security.

How Traders Use the StochRSI

Along with identifying crossovers and overbought/oversold conditions, the StochRSI can be used to identify short-term trends by looking at it in the context of an oscillator with a centerline at 0.50. When the StochRSI is above 0.50, the security may be seen as trending higher and vice versa when it's below 0.50.

The downside to using the StochRSI for this purpose is that it tends to be quite volatile, which means that some smoothing may be needed. Some traders will take a moving average of the StochRSI to reduce the volatility and make the indicator more useful. For example, a 10-day simple moving average of the StochRSI can produce an indicator that's much smoother and more stable.

As an indicator of an indicator (the RSI), the StochRSI is a second derivative of price – in other words, it's actually two steps away from the actual price – which means it can briefly be out of step with an asset's market cost in real time.

Of course, the StochRSI should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness, especially given the high number of signals that it generates. In fact, The New Technical Trader offers another one: The Chande Momentum Oscillator, which has much in common with theStochastic Osciallator – but measures momentum on both down and up days, and doesn't use smoothing.

In addition, non-momentum oscillators, such as the Accumulation Distribution Line, may be particularly helpful because they don't overlap in terms of functionality and provide insights from a different perspective.

Fast Facts

  • The StochRSI is an technical analysis indicator created by applying the Stochastic Oscillator formula to a set of Relative Strength Index (RSI) values rather than to standard price data.
  • The StochRSI's primary function is to identify crossovers and overbought/oversold conditions for an asset.
  • The StochRSI should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness.