The stochastic formula applied to RSI values instead of price, producing a much more sensitive oscillator that reaches extremes frequently.
Instead of asking where the close sits in the price range, Stochastic RSI asks where the current rsi sits within its own range over a lookback. The result swings between 0 and 100 far more often than either parent indicator.
The extra sensitivity gives earlier signals, which is the selling point, and produces a great many of them, which is the problem. In a trending market it hits both extremes repeatedly while price does nothing of the kind.
It is an indicator of an indicator, two transformations away from price, and it inherits the lag of both. Treat readings as a fast timing aid within a directional view established elsewhere, and never as evidence about trend direction itself.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The stochastic oscillator. The stochastic shows where each close sits inside the recent high-to-low range, on a scale of 0 to 100. Readings above 80 mean closes are hugging the top of that range and below 20 the bottom; the circle marks the fast line turning up through the slow one.Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.
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