RSI Divergence indicator for Thinkorswim TOS

The price is for the package.

This product is part of the: RSI Divergence Indicator all-in-one package for Thinkorswim

This is an advanced version of RSI Divergence indicator for Thinkorswim.

 

RSI divergence is one of the most trusted tools in technical trading because it reveals hidden momentum shifts that often precede price reversals. Here’s why it’s powerful, how to use it, and its edge over other indicators:

Why RSI Divergence Matters: Core Strengths

1. Flags Exhaustion in Trends
   RSI divergence signals when a trend is losing momentum despite price pushing to new extremes. This often occurs at market tops/bottoms.

   • Bearish Divergence: Price ↑ (higher high), RSI ↓ (lower high) → Selling pressure builds.

   • Bullish Divergence: Price ↓ (lower low), RSI ↑ (higher low) → Buying pressure builds.

2. Works at Key Overbought/Oversold Zones
   RSI divergence near RSI > 70 (overbought) or RSI < 30 (oversold) amplifies reversal odds:

   • Bearish divergence + RSI > 70 = High-probability sell signal.

   • Bullish divergence + RSI < 30 = High-probability buy signal.

3. Fewer False Signals Than Price Action
   Unlike support/resistance breaks (which can fake out), RSI divergence reflects internal momentum decay – a more reliable reversal predictor.

4. Identifies Continuations (Hidden Divergence)

   • Hidden Bullish Divergence: Price ↑ (higher low), RSI ↓ (lower low) → Uptrend likely to resume.

   • Hidden Bearish Divergence: Price ↓ (lower high), RSI ↑ (higher high) → Downtrend likely to resume.

Real Trading Applications & Examples

Scenario 1: Reversing a Downtrend (Bullish Divergence)

• Price: Makes a new low (LL2).

• RSI: Forms a higher low (HL) > 30 (oversold).

• Action:

  1. Watch for a bullish candle (e.g., hammer) at LL2.

  2. Enter long with stop-loss below LL2.

  3. Target: Nearest resistance level.
     → Signals exhaustion of sellers, impending bounce.

Scenario 2: Topping an Uptrend (Bearish Divergence)

• Price: Makes a new high (HH2).

• RSI: Forms a lower high (LH) < 70 (overbought).

• Action:

  1. Short on confirmation (e.g., bearish engulfing candle).

  2. Stop-loss above HH2.

  3. Target: Support or 1.5x risk.
     → Signals fading buyers, reversal imminent.

Scenario 3: Trend Continuation (Hidden Divergence)

• Uptrend Pullback: Price ↑ (higher low), RSI ↓ (lower low).

• Action: Buy the dip → Confirms trend strength.

Why RSI Divergence Beats Other Indicators

Limitations & Risk Management

1. Not Standalone: Always pair with:

   • Price structure (support/resistance, trendlines).

   • Volume surges (confirms momentum shift).

   • Candlestick patterns (e.g., doji at divergence point).

2. False Signals in Strong Trends:

   • In parabolic moves, RSI can diverge early → Wait for price confirmation (e.g., break of trendline).

3. Timeframe Sensitivity:

   • Daily/weekly divergence > hourly > 5-min.

4. RSI Settings:

   • Default: 14 periods. Shorten (e.g., 9) for day trading; lengthen (e.g., 21) for swing trades.

Tactical Edge: How Pros Use It

• Swing Traders: Spot reversals at key S/R with 4H/daily RSI divergence.

• Day Traders: Combine 15-min RSI divergence with VWAP and volume profiles.

• Crypto Traders: Use RSI divergence to fade extreme FOMO pumps/dumps.

Classic Example:
NASDAQ 100 (2020 COVID crash):

• Price made lower lows in March.

• RSI printed higher lows (bullish divergence) → Preceded a 70% rally.

Key Takeaway

RSI divergence works because it:
✅ Exposes momentum decay before price reverses.
✅ Adds conviction to overbought/oversold readings.
✅ Fits multiple strategies (reversal, continuation).

Always wait for confirmation – divergence alone isn’t a trigger. When aligned with price action and volume, it becomes a high-probability weapon in your trading arsenal.

RSI Divergence indicator gives possible reversal signals when there are discrepancies between RSI and price movement.

The indicator will plot the divergence trend line for the latest signal only, it will reduce loading time and consume less computer resources.

Features:

1. Alert: provide both sound and message alert whenever a divergence is found. You can turn it on or off.
    
2. Length 1&2: Define the range of bars which are used to calculate the recent High and previous High, as shown in picture.
    
3. RSI_mode: Choose "Upper" to only plot signal arrows on price chart.
   Choose "lower" it will plot as an RSI indicator with divergence signals.
    
4. Percent: The difference between High1 and High2, as shown in picture.
    
5. RSI_Percent: The difference between RSI1 and RSI2, as shown in picture.
    
6. All Parameters of RSI: Adjust the inputs of RSI indicator.

How to use:

The purpose of divergence indicator is to spot when price indicator trend are moving into  opposite directions.

Negative divergence:

First, we need to locate the recent High1 and its RSI1 value within the given range(length1).
Secondly, we find the previous High2 and its RSI2 value within the given range(length2).

Then we compare the ratio of these 2 Highs and RSI values to determine if they meet the percentage you set.

For example, if you set "percent=3", then it will check if High1 is greater than High2 by 3%. If you set "RSI percent=5" then it will check if RSI1 is less than RSI2 by 5%.

If both percent conditions are met, there will be a red arrow pointing downward.

Positive divergence:

The indicator will find the recent Low1 and its RSI1 value within the given range(length1).
And then it will find the previous Low2 and its RSI2 value within the given range(length2).

If you set "percent=1", then it will check if Low1 is less than Low2 by 1%. If you set "RSI percent=5" then it will check if RSI1 is greater than RSI2 by 5%.

If both percent conditions are met, there will be a green arrow pointing upward.

Please note: in order to plot this indicator on both price chart and lower chart, you need to load it in 2 places. And set RSI_mode to "Upper" in Price chart and RSI_mode to "lower" in Lower chart. As shown in the following picture.

If you want the same signals on both charts, all parameters have to be consistent on both sides.

This indicator works in any time period and applicable for all securities(Stocks, Futures, Forex, Options, ETF, etc.).

When you use this indicator in a minute chart, it's better to set "percent" less than 1, otherwise, lots of signals will be filtered.

If you want to add any feature to this indicator, please send us a Customization request.