Trading RSI Divergences with Overbought and Oversold Filters

Summary

This strategy looks for disagreement between price extremes and RSI extremes as a possible sign that directional momentum is weakening. A bullish divergence occurs when price makes a lower low without RSI reaching a lower low; a bearish divergence occurs when price makes a higher high without RSI making a higher high. The described entries require bullish divergence while RSI is below its oversold level, or bearish divergence while RSI is above its overbought level. RSI returning to the opposite threshold is used to close positions.

The supplied settings use a 14-period RSI with levels of 70 and 30. The document also includes a BTC/USDT futures backtest configuration covering a one-week interval, but gives no outcome statistics, so it offers no evidence of profitability. Divergences can fail to precede reversals, and RSI is lagging and parameter-sensitive. The written description mentions stop losses, but the provided strategy logic specifies threshold-based exits rather than a separate loss limit. Testing across settings and instruments, adding risk controls, and checking signals with other indicators are proposed.

Key ideas

• Bullish divergence pairs a lower price low with an RSI reading that does not make a lower low.
• Bearish divergence pairs a higher price high with an RSI reading that does not make a higher high.
• Entries require the corresponding divergence and an RSI reading beyond the oversold or overbought threshold.
• The described exits use RSI threshold conditions, while a separate stop-loss rule is not present in the supplied logic.
• The backtest configuration contains no reported performance results.

Tags

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