RSI Divergence
The RSI Divergence indicator automatically detects and marks divergences between price action and the Relative Strength Index. A divergence occurs when price makes a new high or low, but RSI fails to confirm it — a classic early warning of momentum exhaustion and potential trend reversal.
How It Works
The indicator runs in real-time and performs three steps:
1. Fractal Detection
First, it identifies swing highs and swing lows on both the price chart and the RSI using a fractal algorithm. A fractal is confirmed when a bar’s high (or low) is the highest (or lowest) within fractalSpan bars on each side.
For example, with fractalSpan: 3, a swing high requires the bar’s high to be greater than the highs of the 3 bars before and 3 bars after it.
2. Pivot Pairing
Next, the indicator looks for pairs of swing points that satisfy the divergence criteria within the lookback window:
Bearish Divergence (Regular):
- Price makes a higher high (second swing high is above the first).
- RSI makes a lower high (RSI at the second swing is below RSI at the first).
- Interpretation: Price is rising, but momentum is weakening. Sellers may soon overwhelm buyers.
Bullish Divergence (Regular):
- Price makes a lower low (second swing low is below the first).
- RSI makes a higher low (RSI at the second swing is above RSI at the first).
- Interpretation: Price is falling, but selling momentum is decreasing. Buyers may soon step in.
3. Visual Marking
Confirmed divergences are displayed as:
- Colored dots at the divergence point on the price chart.
- Connecting lines between the two swing points (optional, controlled by
showLines).
- The RSI subchart also shows the RSI values at the divergence points.
Indicator Type
Overlay + Subchart — Divergence markers appear on the price chart (dots and lines), and the RSI with its divergence lines appears in a subchart below.
Settings
| Parameter | Type | Default | Description |
|---|
lookback | number | 120 | Maximum number of bars to search back for divergence pivot pairs. Higher values find more divergences but may identify stale ones. |
fractalSpan | number | 3 | Number of bars on each side required to confirm a swing high/low. Higher values produce fewer but more significant pivots. |
minBarsBetween | number | 4 | Minimum number of bars between the two pivots forming a divergence. Prevents detecting noise-level divergences on adjacent bars. |
dotSize | number | 8 | Diameter (in pixels) of the divergence marker dot on the price chart. |
showLines | boolean | true | Draw connecting lines between the two pivot points that form the divergence. |
bullishColor | color | #84cc16 | Color for bullish divergence markers and lines. |
bearishColor | color | #ef4444 | Color for bearish divergence markers and lines. |
Parameter Tuning Guide
| Parameter | Lower Value | Higher Value |
|---|
lookback | Fewer divergences, only recent ones | More divergences, including older setups |
fractalSpan | More swing points detected, noisier | Fewer swing points, only major swings |
minBarsBetween | Allows tighter divergences (more signals) | Requires wider divergences (fewer, stronger signals) |
The default settings are balanced for most timeframes. If you see too many divergences on lower timeframes (1m–5m), increase fractalSpan to 5 and minBarsBetween to 8 to filter out noise.
Types of Divergence
Regular Divergence (Trend Reversal)
Regular divergences signal potential trend reversals:
| Type | Price | RSI | Signal |
|---|
| Bearish regular | Higher high | Lower high | Uptrend weakening, potential reversal down |
| Bullish regular | Lower low | Higher low | Downtrend weakening, potential reversal up |
Hidden Divergence (Trend Continuation)
Hidden divergences signal potential trend continuation:
| Type | Price | RSI | Signal |
|---|
| Bearish hidden | Lower high | Higher high | Downtrend likely to continue |
| Bullish hidden | Higher low | Lower low | Uptrend likely to continue |
Interpretation
Divergence Strength
Not all divergences are equal. Factors that increase reliability:
- Location: Divergences at key levels (support, resistance, VWAP, VA boundaries) are far more significant than those in open space.
- Timeframe: A divergence on the 4-hour or daily chart carries more weight than one on the 5-minute chart.
- Angle: The steeper the divergence (larger difference between price and RSI slopes), the stronger the signal.
- RSI zone: Bearish divergences with RSI in overbought territory (above 70) and bullish divergences with RSI in oversold territory (below 30) are highest probability.
- Number of touches: A “triple divergence” (three successive higher highs with RSI making lower highs each time) is stronger than a simple two-point divergence.
Trading Divergences
A systematic approach to trading RSI divergences:
- Identify the divergence: The indicator marks it automatically.
- Confirm the context: Is the divergence at a meaningful level (S/R, VWAP, previous day high/low)?
- Wait for trigger: Do not enter immediately on the divergence. Wait for price to confirm the reversal — a break of a local trendline, a strong rejection candle, or a close back inside a key level.
- Set stops: Place stops beyond the extreme of the divergence (the second swing point).
- Target the mean: First target is often the SMA(20) or VWAP — the “mean” of the recent move.
Divergences are most reliable at key structural levels — support, resistance, value area boundaries, or previous session highs and lows. A divergence in open space with no structural confluence has a much lower success rate.
Common False Signals
Divergences can fail, especially in:
- Strong trends: In a powerful rally, you may see bearish divergence after bearish divergence as price continues higher. Each one “fails” until the trend finally turns.
- Low-volume periods: Weekend crypto trading or Asian session lulls can produce meaningless small swings that register as divergences.
- Very short timeframes: On 1-minute charts, the noise-to-signal ratio is high. Divergences are most reliable on 15-minute and higher timeframes.
Alerts
RSI Divergence supports the following alert rule:
| Alert Event | Description |
|---|
new_divergence | A new bullish or bearish divergence is detected and confirmed |
fractalSpan bars have passed to validate the swing).
Combining with Other Indicators
| Companion | Enhanced Signal |
|---|
| VWAP | Bullish divergence + price at VWAP = institutional buying zone |
| Session Levels | Divergence at previous day high/low = structural confluence |
| Volume Bars | Divergence + declining volume on second leg = momentum truly fading |
| Bollinger Bands | Divergence at outer band = double mean-reversion signal |
| Delta | Bearish divergence + negative delta on second high = aggressive selling despite higher price |
Practical Considerations
- Repainting: The indicator requires
fractalSpan bars after the pivot to confirm the swing point. This means the divergence marker appears fractalSpan bars after the actual pivot, not in real-time. This is by design — it prevents false signals from unconfirmed swings.
- Lookback scope: Very large
lookback values (200+) can identify divergences where the two pivots are far apart. While technically valid, widely-separated divergences are less actionable because the market conditions may have fundamentally changed between the two points.
- Multiple divergences: It is common to see 2–3 divergences form before a trend actually reverses. The first divergence is an early warning; the second or third, especially with a trigger confirmation, is often the tradeable one.
- RSI — The underlying oscillator; understanding RSI mechanics helps interpret divergences
- MACD — MACD divergences provide similar signals from a different mathematical basis
- Bollinger Bands — Volatility context for divergence trades