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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.

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How It Works

The indicator runs in real-time and performs three steps:

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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.

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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.

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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.

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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.

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Settings

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Parameter Tuning Guide

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.

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Types of Divergence

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Regular Divergence (Trend Reversal)

Regular divergences signal potential trend reversals: Regular divergences are the primary signals this indicator detects.

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Hidden Divergence (Trend Continuation)

Hidden divergences signal potential trend continuation: Hidden divergences are less commonly traded but can be powerful in trending markets. They indicate that the prevailing trend still has strength despite a temporary momentum shift.

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Interpretation

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Divergence Strength

Not all divergences are equal. Factors that increase reliability:
  1. Location: Divergences at key levels (support, resistance, VWAP, VA boundaries) are far more significant than those in open space.
  2. Timeframe: A divergence on the 4-hour or daily chart carries more weight than one on the 5-minute chart.
  3. Angle: The steeper the divergence (larger difference between price and RSI slopes), the stronger the signal.
  4. RSI zone: Bearish divergences with RSI in overbought territory (above 70) and bullish divergences with RSI in oversold territory (below 30) are highest probability.
  5. 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.

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Trading Divergences

A systematic approach to trading RSI divergences:
  1. Identify the divergence: The indicator marks it automatically.
  2. Confirm the context: Is the divergence at a meaningful level (S/R, VWAP, previous day high/low)?
  3. 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.
  4. Set stops: Place stops beyond the extreme of the divergence (the second swing point).
  5. 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.

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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.

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Alerts

RSI Divergence supports the following alert rule: The alert fires once per divergence when the second pivot point is confirmed (after fractalSpan bars have passed to validate the swing).

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Combining with Other Indicators

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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