The Stochastic RSI combines two very popular technical analysis indicators, Stochastics and the Relative Strength Index (RSI). Whereas Stochastics and RSI are based off of price, Stochastic RSI derives its values from the Relative Strength Index (RSI); it is basically the Stochastic indicator applied to the RSI indicator.
As will be shown below in the chart of the S&P 500 E-mini Futures contract, the Stochastic RSI gives more profitable buy and sell signals and overbought and oversold readings, than the Relative Strength Index:
In the chart above of the E-mini S&P 500 Futures contract, the RSI indicator spent most of its time between overbought (70) and oversold (30), giving no buy or sell signals. However, the Stochastic RSI used the RSI indicator to uncover many profitable buy and sell signals.
How to interpret the buy and sell signals of the Stochastic RSI is given next in the chart of the S&P 500 E-mini:
Stochastic RSI Buy Signal
Buy when the Stochastic RSI crosses above the Oversold Line (20).
Stochastic RSI Sell Signal
Sell when the Stochastic RSI crosses below the Overbought Line (80).
The Stochastic RSI is an effective and potentially profitable use of the popular Stochastic indicator and RSI indicator.
