RSI Extension + Divergence

The RSI Extension + Divergence indicator provides a comprehensive analysis of momentum and trend by integrating Relative Strength Index (RSI) overbought/oversold context with automated divergence detection and a trend ribbon filter. This tool aims to identify high-probability reversal and continuation points by confirming price action against momentum exhaustion.

Usage

The indicator can be used to identify four primary trading setups based on the relationship between price, RSI, and the trend ribbon:

• Regular Bullish Divergence (Reversal): Occurs when price makes a lower low but the RSI makes a higher low. This suggests downward momentum is fading. Traders often look for the ribbon to transition from bearish to bullish for entry confirmation.
• Regular Bearish Divergence (Reversal): Occurs when price makes a higher high but the RSI makes a lower high, indicating weakening upward momentum. Confirmation is typically sought through a bearish ribbon flip.
• Hidden Bullish Divergence (Continuation): Found during uptrends (ribbon is green) when price makes a higher low but RSI makes a lower low. This is often used as a signal to enter an existing trend on a pullback.
• Hidden Bearish Divergence (Continuation): Found during downtrends (ribbon is red) when price makes a lower high but RSI makes a higher high, suggesting a continuation of the bearish trend.

Details

The script utilizes a multi-layered approach to signal generation:

• Pivot Detection: Uses specific lookback periods to identify swing highs and lows to anchor divergence lines.
• Trend Ribbon: A proprietary smoothing of multiple moving averages (T3-based) that colors the background or ribbon to indicate market direction (up, down, or neutral).
• Quality Filters: To reduce market noise, the script includes filters for minimum RSI delta (ensuring the divergence is significant), minimum price movement relative to ATR, and "cooldown" periods between signals.
• Visual Themes: Users can choose between multiple aesthetic presets like Neon, Sunset Vapor, or Gray Scale to match their charting preference.

Settings

• RSI Settings: Adjust the length, source, and OB/OS levels for the momentum calculation.
• Divergence Settings: Configure the pivot lookback, maximum search window for signals, and toggle specific divergence types.
• Quality Filters:
  • Require Ribbon Filter: Only shows signals that align with the current ribbon trend.
  • Min Pivot Spacing: Sets the minimum number of bars required between pivots.
  • Min RSI Delta: Ensures a minimum difference in RSI values for a valid signal.
  • Min Move (x ATR): Requires price to have moved a minimum distance relative to volatility.
• Style: Change the visual theme, line widths, and whether to show pivot dots or end labels.
• Ribbon: Select presets (Day Trading, Swing, or Higher TF) and adjust smoothing factors for the trend ribbon.

FAQ

How do I interpret the dashed versus solid lines? Solid lines represent regular divergences (potential reversals), while dashed lines represent hidden divergences (potential trend continuations).

Can I filter out signals that don't occur in exhaustion zones? Yes, you can enable "Only Trigger Near OB/OS" in the Quality Filters to ensure signals only appear when the RSI is near extreme levels.

How can I access the RSI Extension + Divergence? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.