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SRSI - Stochastic Relative Strength Index Indicator

The Stochastics indicator is an oscillator that compares a securities closing price in relationship to its price range over a given period of time. The RSI indicator is also an oscillator which represents the internal strength of the equities price. Both these indicators work on an overbought and oversold formula.

The Stochastics RSI, or SRSI is a combination of these two indicators, where the %K within the Stochastics formula is replaced by the RSI. The formula is then set on a 0 to 100 scale for both the Stochastics indicator as well as the RSI is read in much the same manner as the traditional RSI. When the SRSI reaches up into the upper region above the upper threshold line, the market is considered overbought and anticipate a reversal of the trend. When the SRSI reaches down into the lower region below the lower threshold, the market is considered oversold and a reversal is anticipated. Traditionally, the upper threshold marker is set at 70% and the lower marker is set at 30%.

Calculation

Stochastic RSI is defined as follows:

StochRSI = (RSI - LowRSIn) / (HighRSIn - LowRSIn)

Where RSI is the current level of the RSI indicator, LowRSIn is the lowest level the RSI reached over the last n periods, and HighRSIn is the highest level the RSI reached over the last n periods.

Buy / Sell Signals

Buy signals are generated when the SRSI line crosses below the lower threshold into the oversold region, then re-enters the center channel signaling that the market has reversed and an uptrend is about to ensue.

Sell signals are generated when the SRSI line crosses above the upper threshold, into the overbought region, then re-enters the center channel, signaling that the market has reversed and a downtrend is about to ensue.