# Mastering StochRSI: Definition, Strategies, and Market Impact

Learn how to identify when assets are over or underpriced

![Stochastic RSI](https://www.investopedia.com/thmb/Ff9Wrc1LjhBNhacU_UOCPT0wYrc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Stochastic_RSI_Final_3-2-acdf6be079384154a09239d3073130bb.jpg)

*— Investopedia / Candra Huff*

> **Definition**
>
> The stochastic RSI is an indicator used in technical analysis that ranges between zero and one (or zero and 100 on some charting platforms) and is created by applying the stochastic oscillator formula to a set of relative strength index values rather than to standard price data.

## What Is Stochastic RSI?

  
Stochastic RSI, crucial for those deeply analyzing market momentum, applies the stochastic oscillator formula to the Relative Strength Index (RSI), providing advanced insight into identifying overbought and oversold market conditions. This powerful tool can anticipate significant market shifts, offering traders and investors an enhanced analytical perspective.  

### Key Takeaways

*   Stochastic RSI (StochRSI) is a technical indicator that applies the stochastic oscillator formula to RSI values to identify overbought or oversold conditions in financial markets.
*   The StochRSI oscillates between 0 and 1, with readings above 0.8 typically indicating overbought conditions and readings below 0.2 indicating oversold conditions.
*   StochRSI is more sensitive and generates signals more frequently than the traditional RSI, which may help traders identify potential trend reversals and momentum shifts.
*   Despite its sensitivity, StochRSI can be volatile, and smoothing techniques like a moving average may be used to reduce this volatility and improve the indicator's usefulness.
*   When using StochRSI, it's advised to also incorporate other technical indicators or chart patterns, as relying solely on StochRSI may result in false signals.

![Image](https://www.investopedia.com/thmb/OWvhtbxCJ38evW1r8xTxSQIZMUQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Stochastic-RSI-StochRSI-Definition-June-2021-01-ed8561b2153d4f588be71b0953aa322f.jpg)

*— Image by Sabrina Jiang © Investopedia 2021*

## How to Calculate the Stochastic RSI Formula

$\begin{aligned} &\text{StochRSI}=\frac{RSI-\min\left[{RSI} \right ]}{\max\left[{RSI} \right ] - \min\left[{RSI} \right ]}\\ &\textbf{where:}\\ &RSI = \text{Current RSI reading}\\ &\min\left[{RSI} \right ] = \text{Lowest RSI reading over the last 14 periods}\\ &\;\text{(or your chosen lookback interval)}\\ &\max\left[{RSI} \right ] = \text{Highest RSI reading over the last 14 periods}\\ &\;\text{(or your chosen lookback interval)} \end{aligned}$

> **Fast Fact**
>
> An oscillator in financial markets is a technical analysis tool that varies within a certain range over time, typically used to identify overbought and oversold conditions in an asset. Oscillators are usually displayed as graphs and can signal potential price reversals, helping traders make buy or sell decisions. Common examples include the RSI and the stochastic oscillator.

## Step-by-Step Guide to Calculating Stochastic RSI

The [stochRSI is based on RSI readings](https://www.investopedia.com/technical-analysis-basic-education-4689655). The RSI has an input value, typically 14, which tells the indicator how many periods of data it is using in its calculation. These RSI levels are then used in the stochRSI formula.

1.  Record RSI levels for 14 periods.
2.  During the 14th period, note the present, highest, and lowest RSI reading. It's now possible to fill in all the formula variables for stochRSI.
3.  In the 15th period, note the present, highest, and lowest RSI reading, but only for the last 14 periods (not the last 15). Compute the new stochRSI.
4.  As each period ends, compute the new stochRSI value, using only the last 14 RSI values.

## Understanding the Insights From Stochastic RSI

The stoch RSI was developed by Tushar S. Chande and Stanley Kroll and detailed in their book "The New Technical Trader," first published in 1994. While [technical indicators](https://www.investopedia.com/terms/i/indicator.asp) already existed to show overbought and other conditions when prices were poised to rise or fall levels, the two developed stochRSI to improve sensitivity and generate a greater number of signals than traditional indicators could do.

StochRSI deems something to be oversold when the value drops below 0.30, 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 low a possible move higher. Conversely, a reading above 0.70 suggests the RSI may be reaching extreme highs and could be used to signal a pullback in the [underlying security](https://www.investopedia.com/terms/u/underlying-security.asp).

Along with identifying overbought or oversold conditions, 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.

StochRSI should also be used with other technical indicators or chart patterns to improve its effectiveness, which is especially important given the high number of signals that it generates.

In addition, non-momentum oscillators like the [accumulation distribution line](https://www.investopedia.com/terms/a/accumulationdistribution.asp) may be particularly helpful because they don't overlap in functionality and provide insights from a different perspective.

## Comparing Stochastic RSI and Relative Strength Index (RSI)

Though similar, stochRSI relies on a different formula than RSI. RSI is a [derivative](https://www.investopedia.com/terms/d/derivative.asp) of price, while stochRSI is derived from RSI itself. One key difference is how quickly the indicators move. StochRSI moves very quickly from overbought to oversold or vice versa, while RSI is a much slower-moving indicator. One isn't better than the other: stochRSI just moves more (and more quickly) than the RSI.

### Differences Between Stochastic RSI and RSI

Stochastic RSI

*   **Indicator Type**: StochRSI is an oscillator of an oscillator, applying the stochastic formula to the RSI values to improve sensitivity
    
      
    
*   **Sensitivity and Speed**: StochRSI is more sensitive and faster than RSI
    
*   **Frequency of Signals**: StochRSI generates signals more frequently than RSI
    

RSI

*   **Indicator Type**: RSI is a momentum oscillator that measures the speed and change of price move
    
*     
    
    **Sensitivity and Speed**: RSI is less sensitive and slower than stochRSI
    
*   **Frequency of Signals**: RSI generates signals less frequently than stochRSI
    

## Limitations and Considerations for Using Stochastic RSI

One downside to using the stochRSI is that it tends to be quite volatile, rapidly moving from high to low. Smoothing the stochRSI may help in this regard. Some traders will take a [moving average](https://www.investopedia.com/terms/m/movingaverage.asp) of the stochRSI to reduce the [volatility](https://www.investopedia.com/terms/v/volatility.asp) and potentially 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. Most charting platforms allow for applying one type of indicator to another without any personal calculations required.

Also, the stochRSI is the second derivative of price. In other words, its output is two steps away from the actual price of the asset being analyzed, which means it could be out of sync with an asset's market price in real time.

Now that we better understand the differences between this and other indicators, as well as potential drawbacks, let's look at the differences in calculating stochRSI vs. RSI vs. the stochastic oscillator:

## What Technical Indicators are Similar to the Stochastic RSI?

Some technical indicators that are like the stochRSI include the [Williams %R](https://www.investopedia.com/terms/w/williamsr.asp), the [money flow index](https://www.investopedia.com/terms/m/mfi.asp), and the stochastic oscillator.

## What are Some Tips for Interpreting the Stochastic RSI Most Effectively?

Traders and investors should consider combining the stochastic RSI with other indicators, watching for extreme values of the stochRSI and any divergences from other indicators.

## What Technical Indicators Can Be Used With the Stochastic RSI?

StochRSI can be paired with moving averages, the [moving average convergence/](https://www.investopedia.com/terms/m/macd.asp)divergence and [Bollinger Bands](https://www.investopedia.com/terms/b/bollingerbands.asp). These can give more robust trading signals and reduce the likelihood of false positives.

## The Bottom Line

The Stochastic RSI (StochRSI) offers a more sensitive measure of market momentum by applying the stochastic oscillator to RSI values. It helps traders identify overbought and oversold conditions more frequently and is particularly useful when combined with other indicators. However, due to its volatility, traders should use it alongside additional tools to confirm signals and reduce false positives. Utilizing this indicator prudently can enhance the accuracy of trading strategies and provide deeper insights into market trends.  

> **Article Sources**
>
> 1.  Mark Andrew Lim. "[The Handbook of Technical Analysis](https://www.wiley.com/en-cn/The+Handbook+of+Technical+Analysis+++Test+Bank:+The+Practitioner%27s+Comprehensive+Guide+to+Technical+Analysis-p-9781118498910)," Pages 793-811. John Wiley & Sons, 2015.
>     
> 2.  T. Chande and S. Kroll. "[The New Technical Trader](https://books.google.com/books/about/The_New_Technical_Trader.html?id=uPMJAQAAMAAJ)." John Wiley & Sons, 1994.
>     
> 3.  P. J. Kaufman. "[Trading Systems and Methods](https://www.wiley.com/en-sg/Trading+Systems+and+Methods%2C+6th+Edition-p-9781119605355)," Pages 345-350 John Wiley & Sons, 2019, sixth edition.