Detecting RSI Divergence Between Overbought and Oversold Swings

Summary

This indicator identifies potential RSI divergences by comparing successive excursions into overbought or oversold territory. It uses a 14-period RSI with levels at 70 and 30. During each excursion, it records the RSI extreme and corresponding price extreme; when RSI crosses back through the threshold, it compares that swing with the previous one. A higher price high paired with a lower RSI high marks a sell divergence, while a lower price low with a higher RSI low marks a buy divergence.

A minimum-duration filter requires the RSI to remain beyond its threshold for a specified number of bars before the excursion can qualify. The indicator draws divergence lines and arrows on the RSI pane and emits colored histogram signals for possible system use. This is a signal-detection rule, not evidence of a profitable strategy: the document provides no performance tests, asset or timeframe evaluation, exit rules, or position sizing. Divergence signals can persist or fail as prices continue trending, so they require separate validation and risk controls.

Key ideas

• The indicator compares consecutive RSI swings formed beyond overbought or oversold thresholds.
• A higher price high with a lower RSI high generates a potential sell divergence.
• A lower price low with a higher RSI low generates a potential buy divergence.
• A minimum number of bars beyond the threshold filters short excursions.
• The signals identify possible divergences but the document provides no profitability evidence or trade management rules.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.