What is the Stochastic RSI?
The Stochastic RSI (Stoch RSI) 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.
The Stoch RSI oscillator was developed to take advantage of both momentum indicators in order to create a more sensitive indicator that is attuned to a specific asset or security’s historical performance rather than a generalized analysis.
Example of Stochastic RSI?
Looking at the 2D timeframe of BTC (Bitcoin) we can see that during the dump of early 2020 that the Stoch RSI dipped below 30, indicating that the price of the asset was oversold and a reversal is on the way. As the price of Bitcoin continued to rise, the Stoch RSI index topped 70 a few times and is currently hovering above that area. Now that it’s been over 70 for some time, traders can expect that a sell off will take place soon to reset the index back to 30 before moving higher.
How to Trade using the Stochastic RSI
Many traders use the 30-70 rule for trading the Stochastic RSI. Traders know that the price of the asset is oversold at or underneath 30 and will scoop up the asset or security at a discounted rate. On the other hand, traders know that when the Stoch RSI has a reading of 70 or higher, they’ll start to look for prices to exit and sell off the asset or security before the dump really starts taking form.