6 min reading
Let’s learn about indicator stochastic RSI so you can understand the crypto world better.
A large number of technical analysis tools are used by traders to assess the situation on the market or exchange. Basically, each of these indicators solves only one problem. And an experienced trader cannot rely on the signals of only one indicator. In 1994, Tushar Chand and Stanley Kroll created the oscillator Stochastic RSI. It was adapted for the stock exchanges. Stochastic RSI is an indicator used to determine whether an asset is overbought or oversold, and more to determine current market trends.
History of Stochastic RSI
This trading technique was first developed by Tushar Chande, a trading system wizard and management expert Stanley Kroll. They published a book in 1994 titled “The New Technical trader” with the aim of increasing sensitivity that will lead to overbought and oversold signals.
Understanding Stochastic RSI
This is a type of oscillator, which means that it oscillates above and below the central line. The StochRSI indicator is generated from the regular RSI by applying the Stochastic Oscillator formula. The result is a single numerical rating that oscillates around the centerline (0.5) in the range of 0 to 1. However, there are modified versions of StochRSI that multiply the results by 100, and so the value is between 0 and 100 instead of 0 and 1.
In binary options and forex, this oscillator can give the following information.
- Signals when the maximum and minimum of the price are reached.
- Indicates the direction of the price indicator and the indicator itself.
- It can be used to track the rise or fall in the value of an asset.
Before using this tool, you need to learn all of its features and capabilities. If the chart breaks through the lower threshold, it means that the asset is oversold. If the upper boundary is broken through, it is overbought. The moment the lines are crossed is often considered the optimal time to enter the market.
On a strong trend, the Stochastic indicator has its own specifics. During the growth of the asset Stochastic in most cases will insist on overbought. At the same time, the trend will still go upward. A strong consecutive decrease in the price in the short term gives a picture of oversold, despite the further movement of the trend.
When the lines are crossed it is the main signal to enter. But there is a very important point – it is necessary to divide the crossing point:
- If the two lines are moving up, you have to buy a Call option.
- If two lines are moving down, then you have to buy a put option.
In some cases, a multidirectional movement of the asset and the oscillator appears on the chart. This is called divergence. For example, when an uptrend is clearly visible on the chart, and the indicator lines indicate a downward trend. At such moments the trader receives the information about the possible reversal soon.
Experienced traders recommend that before setting up Stochastic, take into account the time frame on which you plan to trade binary options. Set the period in accordance with it. In order to reduce the number of false signals, it is necessary to use this tool correctly. To do this, you need to use several rules. First, there should be several indicator charts with different timeframes, analysis for 3 periods is often used. And you also need another indicator that will confirm Stochastic signals with RSI. And if there is a strong trend, it is better to postpone a trade based on this instrument.
Because of its greater speed and sensitivity to market movements, the Stochastic RSI can be a very useful indicator for analysts, traders, and investors, both for short-term and long-term analysis. But a large number of signals also means more risk, and for this reason, StochRSI should be used together with other technical analysis tools.