How to Detect RSI Divergence in Pine Script

hey traders in today's video we're going
to be covering a commonly requested
subject which is how to detect RSI
Divergence in pinescript now this is a
complex subject to cover in code because
RSI Divergence and other forms of
Divergence are quite a subjective
pattern you'll see what I mean as we go
through the lesson and I explain the
code but before we begin I should Define
what RSI Divergence is and how we're
defining it in today's lesson so RSI
Divergence is when
price makes a low and then a lower low
but the RSI oscillator makes a higher
low this is what is referred to as
bullish RSI Divergence now whenever this
occurs we generally see price move in
the opposite direction obviously the
catch is we don't know that this has
happened until after the fact because
there's nothing stopping price action
from when we're here
from continuing lower and the RSI making
a lower low so that's what I mean by
this is a subjective pattern that is
difficult to detect in code because we
often don't really know this is RSI
Divergence until after the fact but as
you can see here on the handful of
examples on this chart it can be a
pretty effective signal for counter
Trend or mean reversion opportunities
let's jump into the source code for this
script as always the source code will be
below check the video description and
the pin comment below for a link to the
source code if you want to just go and
copy it right now and start playing
around with it but for those of you who
want to understand the code I'll break
it down in sections so let me cut out
most of this code and I'll paste it in
block by block and explain what each
line of code is doing so first of all
we're just creating a regular indicator
here this is not a strategy script
although we could convert this into a
strategy in the future once we've built
out the tool but as always the first
thing I do here is get some user inputs
so if I open up the settings menu here
we have the Max Bar distance which is
going to be the maximum number of bars
we can consider a valid RSI Divergence
signaled to have occurred so for example
here we have the RSI go overboard and
then price made a low and then we made a
higher high but the RSI printed a lower
hi however my script will not detect
this as RSI Divergence because there are
too many bars in between so there comes
a point when enough time is passed
between the initial RSI high that the
Divergence isn't really Divergence
because price has moved on where in a
new phase of price action and so again
that's a matter of subjectivity it's a
matter of preference how many bars do
you consider the maximum distance in
which you no longer are looking for RSI
Divergence so that's what this setting
is for next we have this stop detecting
after first signal I'll explain what
this does later on when we've pasted in
most of the code for the tool then we
just have our RSI settings here default
14 period RSI default overbought and
oversold levels of 70 and 30. so of
course if we're detecting RSI Divergence
we need the RSI value you could replace
this line of code with any oscillator
indicator first of all this will work on
any time frame in any Market but it will
also work on any oscillator type such as
the macd stochastics and even something
like on balance volume but for today to
keep things simple we're just going to
work with the RSI so to begin with let's
detect bullish RSI Divergence to do this
we are going to need a bunch of
variables to work with so I'll explain
what all of these variables are as we
work through our Divergence detection
code so there's a lot of code here but
don't worry I'll break it down line by
line so this is the RSA this is my
childish version of a RSI and what we're
looking for is the RSI value to go below
30. once this occurs and we have an
oversold condition then we want to track
the lowest low that price action makes
while this condition is met so here as
soon as the RSI gets below 30 we want to
keep tracking each candle's low
and save the lowest low over that period
while this condition is met and that's
what this code here does so first we're
checking is the RSI value the indicator
value below our oversold threshold which
is 30 or as the previous Bar's RSI value
below 30. if the current bar of the
previous bar has an RSI value below 30
then this code gets run and this code is
checking if our initial low price is not
an a then that means we are tracking a
new occurrence of bullish Divergence and
we need to reset the existing initial
low price so again if the RSI has gone
oversold we want to reset our initial
load price and then begin tracking the
most recent low while the RSI was
oversold so first we detect the RSI
being oversold then we reset our tracked
initial low price and then we check here
if check first low is n a or the current
Bar's low is lower than check first low
then we set check for first low to the
current Bar's low price we check the
initial low index the bar index to the
current bar index and then we set the
initial low RSI value to swing low RSI
swing low RSI is this float value
which is getting the lowest RSI value
over the past five bars so visually what
is happening here is when the RSI is
oversold our script is tracking the
lowest bar low
while this condition is met and so the
lowest bar would be this bar here and
when this bar is low is saved as our
initial low in terms of price action we
also check the past five bars and save
the lowest RSI value over that little
look back period and then in the future
what we're going to do is detect the
next low and check if the RSA is higher
than that initial RSI low value and that
this price low is lower than our initial
saved low so that'll be the next block
of code so now that we're tracking and
saving the initial low whenever the RSI
is oversold let me paste this code over
so the next step is to check for a
second load that is lower than the first
low and with a higher RSI value and also
within our maximum distance which is 50
Bars by default so what this code is
doing is first we're detecting an
initial low so the relevant information
is saved here so we've got the lowest
price value and the lowest RSI value we
save that information and then if I
throw on a horizontal array here the
next thing that our script is looking
for is a bar where the previous bar is
low is lower than the current bars low
so we have like a one two three fractal
move so this low is lower than the next
Bar's low and the RSI value is higher
than our initial lowest RSI value that's
what this code here does so it checks is
the previous bars low
lower than our initial saved low press
which is this bar here
and is the current bars low higher than
the previous parslow
if that condition is met then we also
check is our most recent swing low RSI
value so the lowest RSI value over the
past five bars higher than our initial
lowest RSI value and is the current bar
index minus the initial low index less
than or equal to our maximum bar
distance if this condition is met then
we do have bullish RSI Divergence
occurring so we set this to true and in
fact this Boolean input here in the
settings menu stopped detecting after
first signal was a debug parameter that
I was using to develop the script so I
can actually get rid of that now I'm
just realizing so we can get rid of this
input altogether and so now if I save my
code What's Happening Here is when we
detect our second load that is lower
than the first so the second low in
price action
needs to be lower than the first low and
the RSI value needs to be higher than
the first RSI value if that condition is
met and it occurs within the maximum bar
distance that we've set in the settings
menu then bullish Divergence is set to
true
we create a new line that connects our
initial price low with our Divergence
low and then after the line is drawn we
set initial low price to n a and that
will stop the script from detecting any
new
occurrences of RSI Divergence whenever a
swing low is detected at one two three
fractal move is detected while the RSI
value is higher than the initial low
value so this tool will only detect the
very first occurrence of RSI Divergence
just as you would if you were using it
to trade live price action so what this
means is when you're back testing
historically there may be occurrences
when the script detects there was an
example here here we have detected RSI
Divergence but the Divergence wasn't
really confirmed until this low here but
when you're trading in real time you
don't know
that this isn't a true occurrence of RSI
Divergence so normally a Trader that
would use RSI Divergence in their
trading toolbox would wait for a price
action pattern to confirm the RSI
Divergence
um so maybe you wait for a higher close
for example to keep this script simple I
didn't include a Candlestick pattern
confirmation in this RSI Divergence
detection just to keep the script as
simple as possible we didn't add that
extra step into the script perhaps I'll
do that in a future lesson but what this
means is the script will sometimes
detect our side Divergence on historical
price action that was not confirmed so
this was not really confirmed until we
got our price Action Moving higher and
so keep that in mind the script can
definitely be improved it's just a
foundation to begin working with if I
were to add in all the bells and
whistles that I would typically include
in an RSI Divergent script this script
would be probably hundreds of lines long
so for today's lesson I just wanted to
create a foundation for you guys to go
out and play with and expand on but
anyway so far so good the last thing to
do is to draw a little triangle
triangle up green triangle will be drawn
when the RSI Divergence is confirmed so
this bar right here is the bar in which
this condition was confirmed if you had
alerts set this bar is when the alert
would fire and if I were to trade this
pattern I would go long on the open of
the next bar with my stop loss below the
low and my target would typically be
pretty close considering this is a mean
reversion type trade it's counter Trend
so I'm not really expecting price to
Rocket into new highs I'm just expecting
a short-term bounce but anyway this
isn't a trading lesson this is not
Financial advice always do your own
research do your own back testing make
your own decisions seek your own
professional advice this is just for
educational purposes and we are pretty
much done the script is detecting
bullish RSI Divergence so this code is
relatively simple it could definitely be
expanded upon as I said we could add
price action confirmation using
Candlestick patterns and one of the
issues with this script is that if price
action let me see if I can finding an
example here's an example if price
action
goes oversold on the RSI and then price
makes a lower low that also goes
oversold on the RSI this will not be
detected as RSI Divergence because
whenever the RSI goes below 30 all of
our Divergence tracking variables get
reset our initial low price gets reset
and we begin looking for a new low so
once the RSI goes oversold now we're
looking for another low that does not go
oversold so that is one minor limitation
of the script it will only detect major
Divergence where the RSI goes oversold
price may say lower low and the RSI
makes a significant higher low now in
this particular case you can see the
lower low is very marginal so another
thing you could add to the script is
maybe a minimum pip or percentage
distance that the second low must be
from the previous low but again I wanted
to keep the script as simple as possible
so I haven't added any of those features
in perhaps if you guys are interested we
could explore this subject in further
detail and I could expand on this script
and add some of these features I'm
talking about but for now that will do
it for today's lesson let's finish it up
by including our bearish Divergence code
it's identical to our bullish Divergence
code except everything is obviously
detecting things in the opposite
direction for bearish Divergence we're
going to be detecting when the RSI goes
overbought and then price action makes a
higher high but the RSI makes a lower
low so if I get rid of this debug check
this code is now identical to the
bullish Divergence but opposite
direction and now we're detecting the
RSI going overboard then price actually
making a higher high while the RSI makes
a lower low again we could add more
filters in here for example we could add
a minimum distance the price must move
down before a new high is considered to
be a Divergence high but that adds more
and more complexity to the script that I
don't want to go into otherwise this
lesson will be like two hours long so
we'll wrap it up here let's just finally
copy in our alerts code so this will
trigger alerts when we have bearish or
bullish Divergence the reason why we
have four alert calls here
is because these two are for selecting
our script and selecting the any alert
function call
this option will trigger these two
alerts so bullish and bearish Divergence
however if we only want to detect
bullish Divergence or bearish Divergence
we can select these two alert conditions
the biggest advantage of the any alert
function call is that you can input
Dynamic information into the alert
string so here we are
including the distance between the RSI
into the alert message whereas alert
conditions cannot do this they need to
have a static string that never changes
just thought I'd point that out at the
end of the script a little bit of a
bonus tip for those of you who are
unaware that the alert function behaves
slightly differently to the alert
condition alert condition is only
triggered when this condition is true
whereas alert is only triggered within
this if statement so for me if I were to
use a tool like this the challenge is
that I can't fully automate my price
action detection without significant
complexity in the code but I think the
main advantage of this sort of process
session pattern is using your discretion
as a Trader to determine whether or not
the trading opportunity is a valid
trading opportunity and a high quality
trading opportunity so for me the way I
would use this tool would be to set
alerts and whenever RSI Divergence is
detected by the script I could load up
the chart analyze the price action
perhaps wait for Price action
confirmation with some sort of
Candlestick pattern that confirms that
price is likely to reverse and I would
go from there this is not a trading
technique that I would recommend
automating it's not something I'm
interested in trying to automate because
of the fact that there is so much
subjectivity in determining what a valid
Divergence trading opportunity is and of
course there are so many different forms
of Divergence there's hidden Divergence
where the RSI makes a low and then it
makes a lower low but price action may
say higher high that form of Divergence
is quite rare but it does happen and it
can be an interesting trading
opportunity but for today's lesson I
just wanted to keep things as simple as
possible so we're just detecting vanilla
Divergence thank you for watching as
always I hope you found this lesson
interesting if you did make sure to hit
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courses at Pine streetmastery.com and
I'll speak with you in the next lesson
good luck with your trading and your
coding take care