What it means
The relative strength index, or RSI, is a momentum measure that runs from 0 to 100 and is based on recent gains and losses. It is often slow to reach the extremes of 70 or 30 that traders watch for.
StochRSI was designed to be more responsive by measuring the RSI against its own high and low over a recent window. The indicator was introduced by Tushar Chande and Stanley Kroll in their 1994 book on technical trading.
It uses a lookback period, commonly 14, to find the highest and lowest RSI readings, and then calculates where the current RSI sits between them. The result is a value between 0 and 1, or between 0 and 100 on many charting platforms.
Readings above 0.8, or 80, are usually viewed as overbought and readings below 0.2, or 20, as oversold. Because it measures the RSI rather than price, it swings far more quickly than the RSI and spends much of its time at the extremes.
This makes it useful for short-term timing but also prone to frequent signals that do not lead anywhere. Many traders therefore smooth it with a moving average or combine it with a trend filter.
They may take oversold signals only when the price is above a long-term average, which keeps them trading with the trend. Careful position sizing and stop-loss orders are also important.
The nuance is that StochRSI is a second-order indicator, built on top of another indicator, so it is further from the actual price. It can be useful for short-term traders, but it is of little use for long-term investors who care about business fundamentals.
As with all technical tools, it works best as one input among several. Traders often adjust the lookback period to suit their style.
A shorter window such as 7 periods makes the indicator jumpier and suits very short-term trading, while a longer one such as 21 smooths it for slower strategies. Whatever the choice, testing on past data before risking money is the sensible habit.
In practice
Real-world examples.
Example
A day trader watches the StochRSI on a five-minute chart of a technology share. It drops to 0.1 and turns upward, signalling an oversold bounce. She buys with a tight stop-loss and sells half the position when the reading reaches 0.8.
Example
A swing trader finds that the standard RSI rarely falls below 30 for the shares he follows, so he misses entries. He switches to StochRSI, which reaches oversold levels more often, and tests it on past data. He finds it gives more signals but also more false ones.
Example
A student of portfolio management compares StochRSI with the plain RSI across 500 trading days. She finds StochRSI produced three times as many signals, and fewer of them were profitable. She concludes that frequent signals need extra filters.
Formula
Calculation
StochRSI = (current RSI - lowest RSI over 14 periods) / (highest RSI over 14 periods - lowest RSI over 14 periods)
Suppose a stock's 14-day RSI is now 55, and over the past 14 days the RSI has ranged from a low of 40 to a high of 70. StochRSI = (55 - 40) / (70 - 40) = 15 / 30 = 0.5, or 50 on a 0 to 100 scale. If the RSI rose to 67, StochRSI would be (67 - 40) / 30 = 0.9, which is in the overbought zone even though the RSI itself is below 70.Case study
Seen in the real world.
Oakfield Trading is an illustrative, fictional proprietary desk that wanted earlier entry signals than the RSI provided. Its analysts tested a rule to buy when StochRSI crossed above 0.2 and to sell when it crossed below 0.8, on 20 liquid shares.
The rule generated 600 trades over a year, compared with 150 for an RSI rule. The win rate was 52%, but the average gain per trade was small, and trading costs of $4 per trade for each of the 600 trades took $2,400 out of the profits.
The desk added a filter to trade only in the direction of the 50-day average, cutting trades to 220 and improving the average gain. Costs fell to 220 x $4 = $880 a year. The illustrative lesson is that more signals do not always mean more profit, especially after costs.
Watch out
Common mistakes.
- Treating StochRSI as a price indicator, when it measures the RSI relative to its own range.
- Trading every overbought or oversold signal, when frequent signals produce many false alarms.
- Ignoring trading costs, when a high number of trades can erase the profit from small gains.
Questions
People also ask.
How is StochRSI different from the stochastic oscillator?
The stochastic oscillator applies the formula to price, while StochRSI applies it to the RSI values.
What are the typical overbought and oversold levels?
Above 0.8 is generally considered overbought and below 0.2 oversold, although traders adjust these to suit their market.
Is StochRSI suitable for long-term investing?
Rarely, because it is designed for short-term timing and does not tell you anything about a company's value.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related