What’s up Traders, in this article, we’re going to be talking about How To Use StochRSI In Forex & Stock Trading (Stochastic RSI Trading Strategy).
Hey guys in this article, I will show you the correct way of using the stochastic RSI indicator, for day trading and swing trading.
The stochastic RSI is one of my favorite indicators, because it combines the features of the stochastic oscillator and the relative strength index.
The indicator increases the sensitivity, and reliability of the regular RSI indicator, as it applies the stochastic formula to the RSI values.
Instead of the price value, so the stochastic RSI is basically an indicator of an indicator.
But also meaning that this is a lagging oscillator by itself, the stochastic RSI is not a reliable indicator.
If you want to swing trade or day trade only with this indicator, it will be a very hard task to find valid signals.
The differences between StochRSI: Stochastic and RSI
- Stochastic is more volatile
- StochRSI generates more Overbought/Oversold signals
- StochRSI generates more false signals
- Harder to spot Divergences with the StochRSI
Now you might wonder, what are the differences between the stochastic indicator the RSI, and the stochastic RSI, let’s look at this Bitcoin chart to see.
If we can spot some visual differences between, the simple RSI the stochastic, and stochastic RSI indicator from a simple glance.
Stochastic is more volatile
We immediately see that a stochastic RSI indicator, is more volatile compared to the other two indicators, what this means is that it will generate a lot of noise.
StochRSI generates more Overbought/Oversold signals
Also we can observe that the stochastic RSI generates, more overbought and oversold signals, than the simple stochastic oscillator.
StochRSI generates more false signals
If we look closely at the chart, there are more false signals offered by the stochastic RSI, compared to the other two indicators.
We can safely say that during trending conditions, the stochastic RSI is not a reliable indicator, for spotting overbought or oversold entry points of the market.
Harder to spot Divergences with the StochRSI
In what concerns trading divergences, the stochastic RSI also lacks, I don’t know about you, but I can spot the divergences more clearly on the simple stochastic oscillator and error.
How to Trade with StochRSI
- Don’t use StochRSI for Trading Overbought/Oversold levels
- Look for Divergences between StochRSI and the price
- Only short Positions
- Smooth the StochRSI by using longer periods
- Adjust the entry points with MACD
- Look for Market Strenght when a StochRSI and MACD alligned
So how do we trade with a stochastic RSI, first we forget about overbought and oversold signals, as many traders use the error sign a wrong way there is a high chance, that they will also use the stochastic RSI, in a similar manner entering counter-trend positions.
Don’t use StochRSI for Trading Overbought/Oversold levels
Whenever the stochastic RSI indicates overbought or oversold, conditions will only lead to losing positions being a lagging indicator.
My advice is to forget about using stochastic RSI for trading, overbought and oversold conditions, in a non trending market this indicator will generate a lot of false signals tell me.
Look for Divergences between StochRSI and the price
Do you see any clear entries on the Bitcoin chart, because I don’t smarter use of the stochastic RSI, is to look for divergences between the indicator.
And the price of the traded instrument, but here’s the trick if we want to search for divergences, we only need to display the D percent on the chart the reason, I only displayed the D percent is simple.
I like clean and clear charts and the stochastic RSI, could be quite confusing, here’s another Bitcoin chart with 200 exponential moving average.
And the D percent of the stochastic RSI added, what we need to do is to search for divergences, between the stochastic RSI and the price.
But only in the direction of the main trend, indicated by the exponential moving average, so we never take counter trend entries, when trading the stochastic RSI divergences.
Only short Positions
We just stick with a main trend on the market, in this example as we are in a clear downtrend.
We only look for divergences that allow us to short the market, here is my favorite way of using the stochastic RSI, what I prefer to do in order to make the indicator more reliable.
Smooth the StochRSI by using longer periods
Is to smooth it by using longer periods for this setup to be profitable, I prefer to use the 100 period for the errors, and 100 period for the stochastic, the trick here is to add a 50 level and watch for bullish and bearish.
Periods remember, how I said to ignore the overbought and oversold levels, while most traders seek to enter counter trend positions, when they see stochastic RSI in overbought and oversold areas.
Adjust the entry points with MACD
I prefer to look for a continuation movements, but that isn’t enough given with this setup the stochastic RSI, will also offer a lot of noise, that’s why we have to adjust our entry points.
My preference is to add the MACD indicator, with 10, 100, 1 settings basically these MACD settings are tracking, the crossover between the 10 EMA and 100 EMA.
So when the stochastic RSI indicator is above 50, this signals bullish pressure, and when the indicator is below 50 this translates into bearish pressure.
I prefer to confirm the entries with ma city ma city above zero level, so just a bullish outlook while MACD below zero level, indicates a bearish scenario.
Look for Market Strenght when a StochRSI and MACD alligned
The setup is simple, we look for market strenght with a stochastic RSI and MACD aligned.
Now let’s look at this Dow Jones index chart, we simply search for by entries, when the stochastic RSI is above its 50 level only, if the MACD confirms the move.
Also we aim to short the market, when the stochastic RSI is below 50 and the MACD is in negative territory.
Here’s another chart this time the dax index, we look for by signals, when the stochastic RSI is over 50 and the MACD above zero.
And we look for short opportunities, when the stochastic RSI is below 50, and I’m a CD below zero by using the stochastic error side this way.
We gain an important advantage by looking differently at this indicator, we don’t trade overbought and oversold levels.
And we don’t chase tops and bottoms, as most traders do we are searching for market strength as, I was saying before when day trading or swing trading with a stochastic RSI.
We must use it in conjunction with other technical indicators, or chart patterns in order to maximize its effectiveness.
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