RSI vs StochRSI: A Comparison of Two Momentum Indicators
Momentum indicators are technical analysis tools that measure the speed and direction of price movements in financial markets. They can help traders identify trend strength, potential reversals, and entry and exit points. Two popular momentum indicators are the Relative Strength Index (RSI) and the Stochastic RSI (StochRSI). In this post, we will compare these two indicators and discuss their pros and cons.
What is RSI?
The Relative Strength Index (RSI) is an oscillator that ranges from 0 to 100 and indicates the degree of overbought or oversold conditions in the market. It is calculated by comparing the average gain and average loss over a specified period of time, usually 14 days.
The RSI value can be interpreted as follows:
RSI above 70 indicates that the market is overbought, meaning that the price has risen too much and may soon reverse downward.
RSI below 30 indicates that the market is oversold, meaning that the price has fallen too much and may soon reverse upward.
RSI around 50 indicates that the market is in a neutral or balanced state, meaning that the price is moving sideways or following the trend.
The RSI can also be used to identify divergences between price and momentum, which can signal trend changes or corrections. A divergence occurs when the price makes a new high or low, but the RSI does not. For example, if the price makes a higher high, but the RSI makes a lower high, this is called a bearish divergence and indicates a possible downward reversal. Conversely, if the price makes a lower low, but the RSI makes a higher low, this is called a bullish divergence and indicates a possible upward reversal.
What is StochRSI?
The Stochastic RSI (StochRSI) is an indicator derived from the RSI. It applies the formula of the Stochastic oscillator to the RSI values, creating an oscillator that ranges from 0 to 1 (or 0 to 100 on some platforms).
RSI = Current RSI value
min[RSI] = Lowest RSI value over the specified period
max[RSI] = Highest RSI value over the specified period
The StochRSI value can be interpreted as follows:
StochRSI above 0.8 (or 80) indicates that the RSI is overbought, meaning that it is near its highest level over the specified period and may soon reverse downward.
StochRSI below 0.2 (or 20) indicates that the RSI is oversold, meaning that it is near its lowest level over the specified period and may soon reverse upward.
StochRSI around 0.5 (or 50) indicates that the RSI is in a neutral or balanced state, meaning that it is in the middle of its range over the specified period.
The StochRSI can also be used to identify crossovers between itself and a signal line, which can indicate entry and exit points. A signal line is usually a simple moving average of the StochRSI values, such as a 3-period SMA. A crossover occurs when the StochRSI crosses above or below the signal line. For example, if the StochRSI crosses above the signal line, this is called a bullish crossover and indicates a possible buy signal. Conversely, if the StochRSI crosses below the signal line, this is called a bearish crossover and indicates a possible sell signal.
Pros and Cons of RSI and StochRSI
Both RSI and StochRSI have their advantages and disadvantages as momentum indicators. Here are some of them:
Pros of RSI
The RSI is simple to calculate and easy to understand.
The RSI can be used to identify overbought and oversold conditions, as well as divergences between price and momentum.
The RSI can be applied to any time frame and any market.
Cons of RSI
The RSI can produce false signals when the market is in a strong trend or during periods of high volatility.
The RSI can stay in the overbought or oversold zones for a long time, indicating a continuation of the trend rather than a reversal.
The RSI can be affected by the lookback period, meaning that different periods can produce different results.
Pros of StochRSI
The StochRSI is more sensitive and responsive than the RSI, meaning that it can capture short-term price movements and generate more signals.
The StochRSI can be used to identify crossovers between itself and a signal line, which can provide clear entry and exit points.
The StochRSI can be adjusted by changing the lookback period and the signal line, allowing for more flexibility and customization.
Cons of StochRSI
The StochRSI is more prone to noise and whipsaws than the RSI, meaning that it can produce false or misleading signals in choppy or sideways markets.
The StochRSI can be too fast and erratic, meaning that it can miss longer-term trends or reversals.
The StochRSI can be confusing and complex, especially for beginners, as it is an indicator of an indicator.
Personal Opinion
I've almost exclusively used stoch RSI for the better part of two years. What's better about it exactly? That's a great question. I tend to trade very short term movements and I find the crossover with stoch rsi to be a better representation of price action. The secret when it comes to trading on indicators is to build trust within your charts. "90% of day traders lose" is something said a lot. Is it an accurate statistic? Doubtful, but it's true that a lot of people lose. If you could flip a coin and guess 50/50 up or down, you're basically swinging for a 1 in 2 shot of being correct. Even if you have some kind of "intuition" of price action, and you increase that percentage to 70%, you're still leaving 30% of your guesses as incorrect.
If you find an indicator that is correct 90% of the time, you bring your incorrect category down to 10% on average.
When you complete this with a solid risk management strategy, suddenly, you start to flip the statistics in your favor, and you'll often find your losses are kept down and you're able to effectively maximize your profits.
Remember, 1 indicator on its own tells you something. Imagine you have a book and each indicator represents a chapter. If you only have 1 out of 31 chapters of information, you might get the story wrong.
Stoch RSI is not the only indicator that I use. I stack multiple indicators and I find that to produce the best results. Don't be afraid to try new indicators, don't be afraid to completely modify your trade strategy should it not be effective. Don't let emotions or ego stand in the way.
Do you have an indicator that you trust extensively?
Is there an indicator you'd like to see discussed in this blog?
Nick Tussing
Yolo to the Moon
Stocks and Crypto community
Not financial advice.
Not a financial advisor.
