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2018issue C0816-24

Constructing a two-stage stochastic RSI for comparable price-oscillator divergences

A relative-strength-index maps recent gains against recent losses onto a 0-to-100 scale. A stochastic-oscillator is then applied to those values instead of to prices, so regular, hidden, and convergent relationships with price can be marked as explicit comparisons.

  • The relative-strength-index uses one lookback to compare recent gains with recent losses and maps that comparison onto a 0-to-100 scale.
  • Stochastic RSI applies the stochastic range-location reading to relative-strength values rather than to prices, and the output still ranges from 0 to 100.
  • The custom SRSI variant averages buffered range components before scaling and is used mainly to mark regular, hidden, and convergent relationships with price.
  • On the illustrated chart, a higher price top with a lower SRSI top and a lower price bottom with a higher SRSI bottom appear on the custom series but not on the standard stochastic RSI overlay.
Entries in this reading2 entries
Current trackStochastic oscillator170 readingsRelative Strength Index186 readings

Two stages, one bounded oscillator

The relative-strength-index is a bounded momentum series that compares the magnitude of recent gains with recent losses over a chosen lookback of bars and maps the result onto a 0-to-100 scale. That first stage takes one lookback parameter. The archive presents 14 periods as the recommended relative-strength lookback and illustrates the oscillator on a 15-minute GBPUSD chart.

The stochastic-oscillator is a range-location oscillator that places the current close within the high-low range of a defined lookback. The archive describes that reading as a support-and-resistance style momentum reading. In this construction the stochastic formula is applied to relative-strength values rather than to raw prices.

From relative strength to stochastic RSI

A stochastic-rsi is an indicator-of-an-indicator formed by applying the stochastic range formula to a relative-strength series. The second oscillator still ranges from 0 to 100.

How the custom SRSI variant is built

The custom SRSI variant is a smoothed combination that feeds relative-strength data into the basic stochastic formula. It uses relative-strength values as the stochastic input and then averages the range components before scaling, so price-to-oscillator divergences are easier to read. The archive uses it mainly to mark regular, hidden, and convergent relationships with price.

The supplied implementation first buffers relative-strength highs and lows over a stochastic lookback, averages the (value minus low) and (high minus low) series, then scales their ratio by 100, adding 0.1 to the denominator.

Regular, hidden, and convergent relationships

A positive divergence is a new lower price bottom with a higher SRSI bottom. It is used here as a reversal-confirmation pattern after a down move. The archive states that most profitable examples of that pattern appear after a five-impulse down wave.

A negative divergence is a higher price high paired with a lower oscillator high. It is used here as a reversal-confirmation pattern after an up move.

A hidden divergence is a price-to-oscillator mismatch in the direction of the prevailing trend. It is used here as a continuation rather than a reversal cue.

A positive convergent move is defined as price and indicator both advancing with higher lows or higher highs. It is treated as continuation after a correction that ends with a higher low.

What the illustrated chart showed

On the illustrated chart, a higher price top with a lower SRSI top, and a lower price bottom with a higher SRSI bottom, appear on the custom SRSI but not on the standard stochastic RSI overlay.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
37 of 42 in the Stochastic oscillator track
201826-27 pp.Next on Stochastic oscillatorCombining a weekly stochastic, a long moving average, and two-day resistanceA 70-day weekly stochastic marks medium-term trend, and pairing it with a daily stochastic is the method given for sorting long versus short opportunities.
All readings on this track · 42 readings
  1. 1987Stochastic fast and slow construction as a rebuildable stack
  2. 1989Building the stochastic oscillator from close location
  3. 1990Monthly stochastics as a multi-year bond regime filter
  4. 1990Walk-forward screen for yen indicator rules
  5. 1990Slow stochastic construction for index pullback entries
  6. 1991Random Walk Index construction with an adaptive lookback
  7. 1991Building a two-stage stochastic oscillator from close location
  8. 1992Constructing fast and slow stochastic oscillator lines
  9. 1992Constructing nested stochastic lookbacks
  10. 1994Construct the four-state price-volume rank before filtering it
  11. 1996Crowded stochastics, false breakouts, and hidden stops
  12. 1997Fade and follow entries from stochastic extremes
  13. 1998Oversold confirmation as a staged rule-based-entry case
  14. 1999Constructing regular and slow stochastic oscillators
  15. 2001Construct a variable-interval simple moving average from stacked extremes
  16. 2001Threshold RSI and stochastic setups with next-bar stops
  17. 2001Two tests of a rate-adjusted earnings-yield gap
  18. 2002Constructing a two-line stochastic from a range-normalized close
  19. 2002Inspect mechanical stochastic daytrade rules on one bar
  20. 2003Constructing an adaptive stochastic RSI
  21. 2003Four parameters that construct a stochastic oscillator
  22. 2004Volume breakout as signal, pullback as entry
  23. 2004A first currency-market checklist with two averages and a slow stochastic
  24. 2005Shared-scale cycle indexes with companion oscillators
  25. 2005Current-bar versus prior-bar range construction for the stochastic oscillator
  26. 2005Two-session moving-average pullback short
  27. 2006Market condition as a permission layer for moving averages and oscillators
  28. 2008Lock the stop at support before sizing a stochastic entry
  29. 2010Construct a center-line volume oscillator and read it with a stochastic oscillator
  30. 2010Sharpened RSI turns with rainbow averages and a slow stochastic
  31. 2011Build a Spearman rank oscillator from ordered closes
  32. 2012Gold as a regime-dependent hedge in the euro-area crisis
  33. 2012Pairing moving averages with variable-length stochastics
  34. 2014Two-leg stochastic stress oscillator as a rebuild drill
  35. 2014Ingress dates as price bases for relative strength, stochastics, and moving averages
  36. 2017Constructing a dual EMA stochastic from range normalization
  37. 2018Constructing a two-stage stochastic RSI for comparable price-oscillator divergences
  38. 2018Combining a weekly stochastic, a long moving average, and two-day resistance
  39. 2018Weekly and daily stochastic readings with a long moving average and support
  40. 2018A confirming workflow for rotating from discretionary to staples
  41. 2019Stochastic scan thresholds, averages, and formula syntax
  42. 2020Constructing Slow %K as a two-stage helper
By fieldIndicators and filters682 readingsBy year201898 readings
All 170 readings tagged Stochastic oscillator
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