RSI Divergences h

The RSI Divergences h indicator provides a normalized visualization of the relationship between price action and the Relative Strength Index (RSI) to identify potential momentum shifts. By comparing smoothed price movements against smoothed RSI values, it helps traders pinpoint periods where price and momentum are decoupling.

Usage

The indicator can be used to identify trend exhaustion or potential reversals by observing the interaction between the Smoothed RSI and the Smoothed Price lines.

• Crossovers: When the Smoothed RSI (blue line) crosses above the Smoothed Price (white/foreground line), it suggests increasing bullish momentum relative to the price action. Conversely, a cross below suggests weakening momentum.
• Divergence Visualization: The background and area plots change based on the divergence index (dvx). A blue-shaded area at the top of the pane indicates a positive divergence reading above the 50-level, highlighting periods of strong relative momentum.
• Normalized Velocity: The indicator includes an area plot representing the velocity of the ratio between price and RSI, helping to visualize the speed of momentum changes.

Details

The script utilizes several custom mathematical processes to refine its output:

• Normalization: Price and RSI are normalized over a user-defined period to ensure they are comparable on a 0-100 scale.
• Linear Regression Smoothing: Instead of standard moving averages, the script uses multiple layers of linear regression to smooth the RSI and price data, reducing lag while filtering out noise.
• Divergence Index (dvx): This calculation computes the ratio of linear regression slopes over three different periods (1x, 2x, and 3x the RSI period) to create a composite view of how momentum is trending relative to price.

Settings

• Multiplier: Adjusts the sensitivity of the volatility-based bands (standard deviation).
• RSI Period: The lookback period used for the underlying RSI calculation.
• Normalization Period: The window used to scale price and oscillator values between 0 and 100.
• Smoothing: Determines the intensity of the linear regression smoothing applied to the final plot lines.

FAQ

How do I interpret the Smoothed RSI and Smoothed Price lines?

When the Smoothed RSI is trending above the Smoothed Price, it indicates that momentum is stronger than the current price trajectory suggests. Crosses between these two lines are often used as signals for momentum shifts.

What do the shaded background areas represent?

The blue areas at the top indicate that the multi-period divergence index is above its midline, signaling a period where RSI momentum is outperforming price normalization.

How can I access this tool?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.