Stochastic Oscillator vs. RSI: Which Indicator Is Better?

Stochastics and the Relative Strength Index (RSI) are both price momentum oscillators, but each oscillator has its strengths and weaknesses regarding trading stock analysis. Depending on your trading patterns, one or the other may be a better investing signal for you. 

For markets that are “sideways” or very choppy and unpredictable in their movements, stochastics are more useful in determining when to buy or sell on specific stocks by predicting the points just before the stocks reverse. In contrast, the RSI is more useful to determine which stocks are trending in general. Stochastics and RSI are best used in conjunction with one another. 

Stochastics and RSI are both useful trading signals that can help you figure out when to buy and when to let go. Keep reading to learn more about how to use these price momentum oscillators to secure better results while trading. 

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How are Stochastic and RSI Indicators Alike?

Both stochastics and RSI oscillators are used to predict trends in the market before they happen based on past stock performance, but they perform pretty different functions in trading analysis. These oscillators are also known as “leading and lagging” indicators. If a trader reads a signal correctly and buys in before the market begins to move, they have a chance to cash in big time. Both stochastic and RSI indicators are measured on a scale of 0 to 100 in stock charts. 

Stochastic and RSI indicators are also similar in the fact that they both use past market trends to attempt to predict future movements in the market. Stochastic indicators evolved from a probability concept called stochastic processes, which determines mathematical probability based on the evolution of a set of numerical variables. Unlike in traditional stochastic mathematics, these variables are not random. 

While RSI is also used to predict movements in the stock exchange, especially in sudden trending stocks, it is determined more by the magnitude of evolving price changes when stock will skyrocket or reach a point of sudden reversal. Overall, while stochastic and RSI indicators are both used to monitor and predict the same sorts of trends, they aren’t using the same data to do it. 

How are Stochastic and RSI Indicators Different? 

The significant difference between stochastic indicators and RSI indicators is that they are primarily used to monitor different types of markets (though both trading signals can be used for any market analysis). 

Here is a breakdown of how these indicators are used differently: 

  • Stochastic indicators: Stochastic indicators are indicators that are primarily used in stable sideways markets where stock prices fluctuate within an accepted range without much deviation. These choppy but stable stocks can be challenging to make money on compared to stocks that have large trends in either direction. Stochastic indicators reveal when these stocks slide into an overbought or oversold condition, showing traders when a trade is favorable.
  • RSI indicators: RSI indicators are indicators that are primarily used in trending markets. RSI indicates where stocks typically fall in a trading pattern based on mathematical analysis of prior performance. RSI indicators are read differently depending on whether the market is in a bullish (upwards) or bearish (downwards) trend. RSI ranges also fluctuate with the strength of underlying trading trends.

Even though they measure different variables of probability concerning market trends, both RSI and stochastic indicators form some of the core mechanisms for modern technical analysis software. 

When Is It Better to Use RSI? 

If you’re trying to get the best trading results possible, it’s essential to know when it’s best to use each price momentum oscillator depending on the general market trend and the behavior of the stocks at play. 

Here are some scenarios when it is better to look at RSI versus stochastic indicators: 

  • Security adjustments: If you have a stock that is sitting consistently at 80 when it is considered overbought at 70, the RSI indicates that this is a security stock and that the trend for the stock can be adjusted upwards. This is usually an indication of both strong trends as well as stocks with stability and staying power.
  • Analyzing chart patterns: RSI indicators help determine overall chart patterns for a trading stock such as trend lines, bottoms, and double tops. RSI can also show indicators of either resistance or support of a stock’s most recent trend.
  • Price reversal: RSI can be used to determine an upcoming price reversal on a stock by showing how underlying stock prices deviate from RSI trends. These price reversals can then be used to either swoop in and pick up cheap stock or sell off stock before it begins to plummet. 

For those investors and traders who are just wanting to keep an eye on the overarching trend surrounding their trading stock, RSI can give a good signal on whether a stock is doing well or whether it’s foundering. 

When Is It Better to Use Stochastics? 

If you’re trading at relatively small increases on a choppy stock that moves within a specified range, stochastics indicators will be a more useful tool to predict small, precise movements in the stock’s price fluctuations. Overall, stochastics are an excellent choice for making small gains on a relatively stable stock, rather than trying to predict a skyrocket. 

Here are some scenarios when it’s better to use stochastics: 

  • Moving averages: Stochastic probability is an excellent way to determine how a stock is going to act before it begins to move. This is especially important in sideways stock markets where price fluctuations are choppy and seemingly irregular.
  • Long-term and short-term investing: While their emphasis on recent price action makes them best suited for short-term gains in stock trading, stochastic indicators can also be used to determine trends in long-term stock investments as well.
  • Consistent ranges: Stochastic indicators are best used on stocks where prices fall within a consistent range, as stochastic indicators are susceptible to price fluctuations and can be used to determine microtrends in a stock’s movement. 

Overall, stochastic indicators are a more precise price momentum oscillator than RSI indicators. Still, together they can form a much better and more precise picture of what a stock’s upcoming movements may look like based on past performance. 

Does Monitoring Price Momentum Oscillators Work? 

Since the early seventies, the value of technical analysis in stock trading has had a somewhat checkered reputation. Princeton University professor Burton Malkiel made the bold claim that a blindfolded monkey throwing darts at the stock pages could do as well as technical analysis on Wall Street at the end of the day.

Whether or not monkeys make better stock traders than men is still up for debate, but there’s no debating that price momentum oscillators like RSI and stochastics can help give traders a little more understanding of what the overall market trend looks like. 

What Malkiel’s claim (and subsequent statistical experiments) prove is that value stocks tend to do better on the market overall, and small-cap stocks with an inherently more considerable risk also hold an inherently more substantial potential return. 

  • RSI can be a fantastic choice for watching overarching stock trends to determine what stocks can be considered valuable for their return. 
  • Stochastics allow day traders to move quickly to capitalize on small shifts in the market. 

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

Conclusion: RSI and Stochastic Indicators Are Useful Tools for Stocks Analysis

Even though technical analysis can be complicated given the unpredictability of the stock market, taking advantage of past stock trends to make mathematical predictions on how a stock will act in the future is one of the easiest ways to be a proactive trader and make an informed decision on what to sell and what to buy on the stock market. 

After all, just because monkeys pick their stocks with darts and blindfolds doesn’t mean that we have to leave our trades to luck. 

BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!

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    1. Ferri, R. (2020, December 15). Any monkey can beat the market. Forbes.
    2. Probability and stochastic methods. (n.d.). Mathematical Sciences.
    3. Simple technical trading rules and the stochastic properties of stock returns. (n.d.). Santa Fe Institute.
    4. What is RSI? – Relative strength index – Fidelity. (n.d.). Fidelity Investments – Retirement Plans, Investing, Brokerage, Wealth Management, Financial Planning and Advice, Online Trading.

    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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