To add to darrenf's reasoning regarding RSI/Stochasics:
As stated, both are types of momentum oscillators. They measure THE VELOCITY OF PRICE MOVES, or the rate of change.
Therefore , when the SPEED of a price move decreases, for example, the oscillator goes DOWN, BEFORE THE PRICE DOES.
This gives us advance warning of a turn, (amongst other factors)
"MOMENTUM LEADS THE PRICE."
A simple analogy or two makes things clearer.
When you toss a ball into the air, it must slow down BEFORE it starts to head back to earth! So, it's MOMENTUM FALLS , BEFORE IT'S HEIGHT.
Similarly, when a car approaches a turn, it invariably must SLOW DOWN before turning. (ie SPEED DECREASES BEFORE CHANGE OF DIRECTION)
RSI (Relative Stength Index) was developed by J. Welles Wilder, Jr.
It's formula uses a specified range of periods (days, weeks,etc) to interpret and depict certain momentum charcteristics.
RSI = 100 - { 100/(1+RS) }
where:
RS = Average of X periods up closes/Average of X periods down closes
Stochastics were devised by George Lane. It's formula represents the distance of a close to the low of a recent range, as a percentage of the total range (high to low).
It graphically depicts the phenomena of closes moving away from the highs near a top, or closes moving away from the lows near a bottom.
Which is another way of saying MOMENTUM TURNS BEFORE PRICE
In Fast Stochasic :
%K = {Ct - Ln/Hn - Ln} * 100
where :
Ct = the closing price today
Ln = the lowest low for n days
Hn = the highest high for n days
N = the number of days
%D = %K smoothed over 3 days
For the Slow stochastic:
the %K is the %D of the fast stochastic.
the %D is the new %K smoothed again over 3 periods
You don't HAVE to know how these are formulated, but I believe it helps to see what EXACTLY the are supposed to be telling you.
I hope that's made things clearer (Or has it muddied the waters even more???)
