Stochastic RSI is an oscillator that varies between 0 and 1, and represents the level of the RSI indicator relative to its range over n periods.
Stochastic RSI is defined as follows:
StochRSI = (RSI - LowRSIn) / (HighRSIn - LowRSIn)
where RSI is the current level or the RSI indicator, LowRSIn is the lowest level the has RSI reached over the last n periods, and HighRSIn is the highest level the RSI has reached over the last n periods.
The Stochastic RSI indicator has 1 parameter, namely n, specifying the number of periods over which the low and high points of the RSI are to be considered.
The Stochastic RSI can be interpreted in several ways:
- Overbought/Oversold signals: When the Stochastic RSI is above 0.80, then the target currency pair is considered to be overbought and a downward correction might be expected in the near future. Conversely when the Stochastic RSI is below 0.20, then the target currency pair is considered to be oversold and an upward correction might be expected in the near future. Some consider the Stochastic RSI crossing upward across the 0.2 line as a buy signal and the Stochastic RSI crossing downward across the 0.80 line as a sell signal.
- Centerline crossover signals: Some consider the Stochastic RSI crossing the 0.50 line as a confirmation of another signal. Others consider the Stochastic RSI crossing the 0.50 line in an upwards direction after it identified an oversold situation as a buy signal, and consider the Stochastic RSI crossing the 0.50 line in a downwards direction after it identified an overbought situation as a sell signal.
- Divergence signals: If the Stochastic RSI is increasing and crosses the 0.20 line while the target exchange rate are still declining, then this is interpreted by some as a buy signal. Conversely, if the STochastic RSI is decreasing and crosses the 0.80 line while the target exchange rate is still rising then this is sometimes interpreted as a sell signal.