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This basic Stochastic RSI trading strategy can be used on any time frame and any Forex currency pair or asset which you trade. The Stochastic RSI (StochRSI) is an indicator which is 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 (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.
The StochRSI oscillator was developed to take advantage of both momentum indicators in order 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 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 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 deems something to be oversold if 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 low a possible move higher. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme highs and could be used to signal a pullback in the underlying security. Along with identifying 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. If the StochRSI is above 0.50, the security may be seen as trending higher and vice versa if it is below 0.50. 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 addition, non-momentum oscillators like the accumulation distribution line may be particularly helpful because they do not overlap in terms of functionality and provide insights from a different perspective. |
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