How to Trade using Stochastic RSI (StochRSI)

the stochastic rsi is another incredibly popular technical indicator used to gauge momentum and identify overbought or oversold conditions it's essentially an indicator of another indicator basically used to measure rsi relative to its own range as you'll see here in a minute it is incredibly similar to rsi however it's generally more of a fast moving indicator giving us more potential buy or sell indications today we'll be doing a quick breakdown of how the indicator is actually calculated how to find potential buy or sell signals using the stochastic rsi and how to create a custom scan to actually find those stock that meet these buy or sell criteria right now quickly running through the calculation of what we're actually looking at right now stochastic rsi is equal to the current rsi minus the lowest low in the rsi divided by the highest high minus the lowest low now depending on the platform that you're using this will then generate a value somewhere between zero to one or zero to a hundred really it's not that important it'll just depend on how your platform chooses to express the value now if the value of the stochastic rsi is equal to zero it would mean that the rsi is at its lowest level in the last 14 days if it was equal to 50 it would mean the rsi is right between its 14-day range and then finally if the value is equal to 100 the rsi is at its highest level in the past 14 days looking here at the indicator itself you'll notice that the percent k line is the blue line whereas the purple line is going to be the percent d line the blue line is the actual stochastic line showing us the current value of the stochastic rsi the purple line on the other hand is the three period ema of the stochastic line many traders may choose to use the crossovers of these two lines as their potential buy or sell signals but i'm going to touch on that a little bit later besides the lines you'll also notice the zone i've highlighted in the center between the ranges of 20 and 80. like the rsi the stochastic rsi can also be used to identify potential oversold or overbought conditions traditionally any time the indicator is below 20 it is said to be oversold anytime it's above 80 it is said to be overbought however we will not use a simple oversold or overbought indication in and of itself as our buy or sell signal there will be many times in which you'll see a strong uptrend and the stochastic will remain in an overbought condition without any downward moves conversely in a strong downtrend you may see the stochastic in an oversold condition for a very long period of time without any upward moves this is because these stochastics are a fast-moving study and they may give us numerous false buy or sell signals that we really need to be wary of so generally when utilizing the stochastic rsi we'll also be very mindful of the overall trend in the stock we're only going to be searching for oversold conditions and crossovers when the stock is in an uptrend then on the short side only searching out overbought conditions and a stochastic crossover in a downtrend a somewhat helpful and quick way for us to see the overall trend in the stock is through the use of moving averages in this case we'll specifically be using the 21 and the 50 period exponential moving average lines looking here you'll notice that the teal line is the 21 period ema and the yellow line is the 50 period ema generally when we see the moving averages pointing up and the 21 period ema above the 50 period ema we can determine that the stock is in an uptrend looking on this chart specifically we can actually see several points in this uptrend when the socasic rsi reached oversold territory and then had a crossover each of these crossovers would then be our buy signals when it's in an uptrend now conversely looking instead at a stock in a downtrend we can see that the 21 period moving average is trending below the 50 period moving average we're then going to be looking for periods on which the stochastic rsi is going to reach an overbought condition and then there is a crossover between the k line and the d line again looking at this chart we can actually see several potential short signals in this downtrend when the crossover occurred and where we could have actually entered a short position so again in this case when the stock is in a downtrend we are looking for a condition when the stochastic rsi is reading an overbought threshold and then the k line crosses below the d line so now that we actually have an idea of what we're looking for let's actually create a scan to find stock that meet these criteria right now now in order for us to do that we are going to come up here to the scan tab specifically go ahead and select that from there you can actually see i already have three filters down below and i'm actually going to use these baseline filters at the moment you can see i'm only looking for companies that trade over ten dollars a share have traded over a million shares at the time of running the scan and are worth at least one billion dollars so using these filters as the baseline i'm next going to add a study filter to look for stocks that are in an uptrend but have also recently showed an oversold condition on the stochastic rsi and a recent crossover in order for us to do that we are going to come over here to the add a filter box in the upper right hand corner go ahead and select that i'm then going to come down and specifically select a study filter i'm then going to come over here to the default filter adx crossover and go ahead and select that looking down below here this is most definitely going to be a custom filter we're going to have to write this one ourselves we'll then see a little pop-up window come up let me go ahead and drag that down so you guys can see it the very first thing i need to do is go ahead and delete whatever's in here start fresh now the very first filter we're going to add is actually looking for stocks that are an uptrend to find these what i'm going to look for is stocks where the 21 period ema is currently greater than the 50 period ema now this won't be perfect but it is our starting point so let's come down here and add a condition we're going to select a condition it's going to be a study condition to go ahead and search for exponential moving average in here and select it i then need to come down here and specify that this is going to be the 21 period ema i'm then going to come over here and specify that i want it to be greater than the 50 period ema let me go ahead and find that next and then all i have to do is change this from 9 to 50. now that i'm happy with that i'll simply hit save and we still have a lot of work to do i'm going to then come down here and add another condition for this next one we're going to look for stocks that were recently oversold on the stochastic rsi so what i'm going to do is come up here to select a condition it's going to be a study condition and we're going to search for stochastic rsi and go ahead and select it in the list here i'm going to go ahead and leave it as the default values of course if you guys need to change this some people prefer to use the 10 period stochastic rsi this is where you would change that right here but in my case i'm fine with it and all i'm going to do next is come over here and select is less than i'm going to select a value condition and then change this to less than 20 which remember is oversold on the stochastic rsi now that i'm happy with that i'll simply come down here and select save and we're almost done the next thing i'm going to do is look for that stochastic crossover so finally we'll come down here and add another condition and i'm going to run through this pretty quick i think you guys get the general idea of how to do this now we're looking for a stochastic crossover of the k line crossing the d line so right here you notice i've got the k line on the left hand side i'm then going to say crosses above the stochastic rsi as well but this time i'm looking for it crossing above the d line and i am going to say it had to have happened in the last day so we're going to leave right here where it says within one bar and we're going to go ahead and hit save i'm going to leave this as the daily aggregation and i'm just going to come down here and select ok so now that i'm happy with that and we've essentially created a scan that are looking for stocks that are in an uptrend but are also oversold on the stochastic rsi but have also had a recent crossover if we wanted to find those companies that match all of those criteria right now let's just come over here and hit scan looking down below you can actually see there are 10 companies that actually match my criteria right now and in order to test this let's actually look at a couple of them so looking down here we can see ctra let me go ahead and pull up a chart and throw in ctra up there taking a look over here let's go ahead and zoom in just a little bit at the moment to me it does look like the stock is in an uptrend at least generally speaking we can see that the 21 period ema is above our 50 period ema so it matches our criteria in that regard looking down below at the stochastic rsi we can't see it is in an oversold condition it's below the 20 line currently and looking down below there if i were to highlight it it actually just recently had a crossover in the last day so as of right now at the time that i ran the scan ctra meets all of my buy criteria now of course that won't always be the case if i were to come back here to the scan tab and let me take another look at one of these guys let's throw in m-a-r let's go ahead and double check this one m-a-r again coming over here to the right hand side we can see that to me this looks like it's more of in a downward trend even though the 21 period ema is above the 50 period it doesn't look like it's still got some upward momentum to it however to our skin this does meet our search criteria right now the 21 period ema is above the 50. the stochastic rsi is oversold and there was just recently a crossover in the past day so again to me this one would be a little bit iffy but technically it does meet all of our scan criteria but i think this was a fairly comprehensive introduction to the stochastic rsi and the different ways you guys can use it in your trading if you have any additional questions for me or recommendations for other studies you guys would like me to discuss please leave them down below but that wraps up today's video on the stochastic rsi i hope you all have an amazing rest your week and i'll catch you on the next one

Channel: shortthestrike

Views: 3,685

Keywords: stochrsi strategy, stochrsi trading strategy, stochastic rsi, stochastic rsi indicator, trading with stochrsi

Id: 3aHJZKRqLwg

Length: 9min 30sec (570 seconds)

Published: Mon May 16 2022