Stochastic RSI Fast
If you are in a trending market, let’s say an uptrend, the RSI will repeatedly indicate overbought conditions, providing a number of false signals. In addition, the RSI peaks never reach the oversold level, so the indicator fails to generate buy signals. A solution to this problem is to apply the stochastic oscillator to the RSI. This occurs because oscillators typically do not adjust to the market’s ever-changing cycle length. The stochastic RSI compares the current oscillator reading to the range of its readings over a given period.
The Stochastic RSI measures where the current RSI reading is (on a percentage basis) relative to the range of the RSI over the past 14 days. The indicator is more sensitive than the original RSI.
The Stochastic RSI provides excellent signals in a sideways market.
Trends render typical oscillator signals useless. However, this oscillator of an oscillator can help you to be more effective in all types of market conditions.
The Stochastic RSI is a second derivative of price, which means that it doesn’t always look similar to the price. The indicator is deemed to be oversold when 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 correction. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme levels and could be used to signal a pullback in the underlying security.
Stochastic RSI can be used to identify short-term trends by looking at centerline (0.50) crossovers. When the Stochastic RSI is above 0.50, the coin(pair) may be seen as trending higher and vice versa when it’s below 0.50. The downside to using the Stochastic RSI for these reasons is that it tends to be quite volatile, which means that some smoothing may be needed. Some traders will take a moving average of the Stochastic RSI to reduce the volatility and make the indicator more useful. For example, a 10-day simple moving average of the Stochastic RSI can produce an indicator that’s much smoother and more stable.