The Relative Strength Index (RSI) and Stochastic are both useful indicators but what if we look at RSI vs Stochastic debate? In fact, everything has disadvantages or weaknesses despite having advantages and strengths. That’s why this RSI vs Stochastic comparison must be a very interesting one.
As a simple rule, one might be better for you depending on your trading strategy and system. But deciding which one of the two to use in your system requires knowledge of both. Moreover, you also need to know the differences between the RSI and Stochastic to choose one of them.
Fortunately, if you are looking for a complete RSI vs Stochastic picture, you are at the right platform. In this article, we are going to explain the differences between these two indicators. We’ll also highlight which one suits you if you are following a particular trading system. So don’t go away. Let’s find out!
RSI vs Stochastic – introduction
It is important to know about the RSI and Stochastic indicators before knowing RSI vs Stochastic.
What is the RSI?
The RSI is a momentum indicator that helps you in determining overvalued or undervalued conditions of security. It works by measuring the speed and magnitude of recent price changes in security. The RSI also enables you to determine upcoming trend reversals or corrections. It gives you values between 1 to 100. The RSI value above 70 indicates overbought conditions. Whereas, a value below 30 indicates an oversold condition.
What is a Stochastic Oscillator?
The Stochastic Oscillator is also a momentum indicator. It also helps you in determining overvalued or undervalued conditions of security. The Stochastic also gives you values between 1 to 100. However, it works on different principles. This oscillator works by comparing the closing price of a security to the prices of that security over a particular period. A Stochastic value above 80 indicates overbought conditions. Conversely, a value below 20 indicates an oversold condition.
RSI vs Stochastic
Now you know what RSI and Stochastic Oscillators are, what they tell traders, and how they work. Did you notice any similarities or differences? Let’s dig a bit deeper to find out more about it.
RSI vs Stochastic – similarities
There are similarities between the RSI and Stochastic Oscillator. What are these? Let’s find out.
- As you know, both oscillators enable traders to predict upcoming trend reversals. If traders use them correctly, they are pretty powerful indicators and enable traders to make significant gains by entering positions before the market.
- Secondly, both are momentum indicators. Both RSI and Stochastic use historical price data to predict future price movements.
- Thirdly, both indicators give findings in terms of value ranging from 1 to 100. Traders use those values to find out overbought/oversold market conditions.
RSI vs Stochastic – differences
As we discussed earlier, RSI and Stochastic work on different principles. The RSI works by measuring the speed and magnitude of recent price changes of security to give values. On the other hand, Stochastic works by comparing the closing price of a security to the prices of that security over a particular period. However, this is a minor difference between the two. The major difference lies in the fact that they are used in analyzing different kinds of markets.
- The RSI – the RSI Oscillator is the better of the two in trending markets. It conducts a mathematical analysis of past price action and predicts where prices will fall in the future. Moreover, traders read the RSI indications according to the trend. That means, they consider values depending on whether the market is trending downward or upward.
- The Stochastic Oscillator – on the other hand, the Stochastic Oscillator is the better of the two in the sideways market. A sideways market is one where prices rise and fall within a particular range. Thus, making gains in such market conditions is difficult. Traders use the Stochastic Oscillator to determine overbought/oversold conditions. Thus, it helps them predict favorable trades.
In short, it is important to understand when to use the RSI and when to use the Stochastic Oscillator. It helps you increase the odds of your success in trading.
RSI vs Stochastic – when to use the RSI
The following are some particular situations where you should use the RSI Oscillator for making better trading decisions.
- As you know, the RSI tells traders how the price of security deviates from the RSI trends. Therefore, you can predict an upcoming price reversal. You can use this reversal signal to buy stocks before they explode or sell before their prices decline.
- You can also determine stable stocks with staying power using the RSI. For example, you own a stock that has a constant RSI value of 80 while a value of 70 indicates overbought. Thus, you can conclude that this stock is stable and has a high potential for an adjusted upward trend.
- You can also use the RSI together with chart patterns of trending securities. It helps you determine areas of support or resistance with precision.
RSI vs Stochastic – when to use the Stochastic Oscillator
As you already know, the Stochastic Oscillator is the best bet when trading in a sideways market. Thus, you can capitalize on it to achieve smaller gains on stable stocks. Additionally, the following are some particular situations where you can capitalize on the RSI Oscillator for making better trading decisions.
- The Stochastic Oscillator is capable of detecting very small price movements. Therefore, you can use it to determine micro-trends in the prices of a security.
- The Stochastic Oscillator is also capable of predicting how a security’s price is going to behave even before it begins to fluctuate. This is particularly right in sideways markets. Therefore, you can capitalize on it for short-term trading gains.
RSI vs Stochastic is a good point when it comes to two useful indicators the RSI and Stochastic Oscillator. Both are powerful indicators and have unique strengths. However, it is important to learn the differences between the two. It helps you understand which one of the two you need to use under certain circumstances. The RSI is a better choice during trending markets. Whereas, Stochastic has the upper hand when the market is sideways.