The RSI can fail to react to the changing cycles or volatility displayed by the markets. If the market starts to trend, the RSI often will fail to reach an appropriate level that would trigger a trade to enter in the direction of the trend. Applying the stochastic oscillator to the RSI creates a dynamic indicator that is more in tune with current volatility.
Professional traders have a set of criteria for identifying the type of market environment — uptrend, downtrend, or trading range — and use the appropriate procedures for the type of market. Understanding how an indicator functions in the three different conditions is an important step towards developing a solid trading plan.
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