Stochastic RSI

Stochastic RSI in Downtrend Figure shows a downtrend. The RSI readings are shifted lower because of the trend, and the indicator never reaches its overbought level. By contrast, the stochastic-RSI tags its overbought level several times. During downtrends, support levels are broken, the resistance levels stairstep lower, and the RSI drops below 30 and never reaches its overbought level. However, the stochastic-RSI will generate overbought readings. Professional traders have a set of criteria for identifying the type of market environment: uptrend, downtrend, or trading range. and use the appropriate procedures for the type of market. Understanding how an indicator functions in the three different conditions is an important step towards developing a solid trading plan.   History of StochRSI The StochRSI indicator was introduced by Tushard Chande and Stanley Kroll. In their book (Publication Date: April 1994), The New Technical Trader, Tushard Chande and Stanley Kroll explain that Relative Strength Index can oscillate between 20 and 80 for extended periods without reaching extreme levels. In The New Technical Trader, trading system wizard Tushar Chande and money management expert Stanley Kroll present a bold new array of dynamic, price-based, and risk control indicators that provide timely, reliable answers to the difficult analytic challenges of pattern recognition, variable indicator length, and price projection. Developed by the authors to overcome the specific limitations of existing technical indicators, they can be used in virtually any market—futures, commodities, stocks, indices, and mutual funds. Each new indicator is supported by step-by-step tutorials and real-world trading scenarios that illustrate the best strategies for its use, and show how to adapt it to your trading style. Now you can develop a successful, comprehensive personalized trading plan using: 1-    New momentum oscillators—the Chande momentum oscillator, stochastic RSI oscillator, variable-length dynamic momentum index—that overcome the limitations of the relative strength index 2-    Qstick, a quantitative candlestick that generates objective numbers instead of subjective patterns 3-    Linear regression analysis that quantifies trendiness, projects prices, and prompts the development of a better game plan Tushard Chande and Stanley Kroll, made this indicator Stochastic RSI to improve sensitivity and generate a lot more overbought and oversold signals.   Stochastic RSI vs RSI As shown below in the chart of the Nasdaq, the Stochastic RSI gives more profitable buy - sell signals and overbought or oversold readings, than the Relative Strength Index: (The chart is dailiy) In the chart above, the Relative Strength indicator spent all of its time between overbought and oversold levels.The investor lost his money.( at the beginning: 2125 ----> at the end of the period 1978. ) Although the Stochastic RSI gives a lot of signals (about 20 buy or signals), this is better than "doing nothing". In addition the correct signals are much more than wrong signals. (Notice this chart is basic Nasdaq index chart and our indicator is not calibareted yet. For short term trend or for long term trend prediction, calibration may be useful.) Also in volatile market condition Stochastic RSI gives many profitable signals, but RSI does not give any buy and sell signals. Briefly; Relative Strength Index  is a price following line that attempts to display the strength of a movement without the associated trend to confuse the issue. The Stochastic RSI oscillator, is an indicator of an indicator. The standard Stochastic monitors relationships between closing prices and the range. The Stochastic RSI indicator monitors the RSI values and their relationship over a period.