CDC RSI Divergence 15-10-2016

The CDC RSI Divergence indicator helps traders identify potential trend reversals by detecting bullish and bearish divergences between price action and the Relative Strength Index (RSI). By utilizing an ATR-based reversal filter, the tool automatically highlights these occurrences on the chart to assist users in adjusting their market bias.

Usage

The indicator is designed to provide visual confirmation of momentum shifts that may precede price reversals. It is recommended to use this tool alongside trend-following indicators to filter signals within the prevailing market context.

• Bullish Divergence: Indicated by a green fill above the 50 level. This occurs when the price makes a lower low while the RSI makes a higher low within an oversold region.
• Bearish Divergence: Indicated by a red fill below the 50 level. This occurs when the price makes a higher high while the RSI makes a lower high within an overbought region.
• Persistence: Once a divergence is detected, the visual highlight persists for a set number of bars (defaulted to 25) to ensure it is easily recognizable for the trader.

Details

This script identifies divergences by comparing local extremes over two distinct lookback periods: a short-term period and a long-term period. To reduce false signals and "weed out" minor price fluctuations, the indicator incorporates an Average True Range (ATR) multiplier. This multiplier acts as a dynamic threshold, requiring a specific amount of price reversal before a divergence is confirmed, making the indicator adaptable to different assets and timeframes.

Settings

• Data Source: Selects the price data used for calculations (default is OHLC4).
• RSI Period: Sets the lookback length for the RSI calculation.
• Overbought Level: Defines the upper threshold for the RSI (default is 70).
• Oversold Level: Defines the lower threshold for the RSI (default is 30).
• Short Lookback Period: The window used to find the most recent price and RSI extremes.
• Long Lookback Period: The window used to find the prior price and RSI extremes for comparison.
• ATR Reversal Multiplier: Controls the sensitivity of the divergence detection by requiring a price reversal proportional to the current volatility.
• Alert Period: Determines how many bars the divergence signal remains visible on the oscillator.

FAQ

How do I interpret the divergence fills?

A green fill above the 50 midline indicates a Bullish Divergence, suggesting potential upward momentum. A red fill below the 50 midline indicates a Bearish Divergence, suggesting potential downward momentum.

Can I adjust the sensitivity for different timeframes?

Yes, you can modify the ATR Reversal Multiplier. A higher multiplier will require a more significant price move to trigger a signal, while a lower multiplier will make the indicator more sensitive.

How can I access the CDC RSI Divergence indicator?

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