The Complete Guide to Thinkorswim RSI Divergence Indicator and How They Signal Market Trends
Traders can get confused with many divergence signals they receive, which do not help. This is the reason why an RSI Divergence indicator on Thinkorswim can help you pinpoint the most valuable signals.
Unlike the regular divergence indicators, RSI Divergence indicator has a unique algorithm that filters out noise (minor divergence). It is not surprising to see only one divergence for six months when using this one.
This article will get you acquainted with the various options you have for a relative strength index (RSI) indicator version on Thinkorswim. It will also discuss how it works and its impact on trading.
RSI Divergence Indicator on Thinkorswim: Free
This RSI divergence indicator on Thinkorswim, like many other popular ones, was developed by the user Mobius.
When set up correctly it should look like this:
When using the indicator the divergence line (dotted) will appear at the close of the next candle, otherwise, the candle following the most recent high or low. This is because the divergences are slightly delayed due to waiting for confirmation from the candles.
Also if a new low or high is created afterward, the line will be replaced. You should also note that it only displays the newest divergence, not all divergences.
Some users have asked if it is possible to get the indicator to scan and give you the divergence automatically but it appears that for now you need to identify them yourself.
However there is a script that can paint arrows and then you can add audio alerts using this.
A word of warning though, it seems the indicator does not work correctly 100% of the time and can provide false positives.
There is also a short but very useful 2-minute video on Youtube.
RSI Divergence Indicator on Thinkorswim: Paid version from Patternsmart
Once again for indicators on Thinkorswim, Patternsmart provide a paid version, this time for VIP price of $99. You may feel it is money well-spent instead of tinkering with code yourself that may involve a lot of trial and error as it doesn't seem to work 100% correctly.
This version gives possible reversal signals whenever there are discrepancies between RSI and price movement. This divergence is present when the oscillator indicator and the price move in different directions.
To simplify, an uptrend Negative Divergence occurs when the price reaches a higher high and the indicator fails to follow. Meanwhile, in a downtrend, positive divergence occurs when the price reaches a lower low, and yet the indicator fails to reach a lower low.
Normally, the oscillator indicators and the price trail would be trailing each other and moving in the same direction. When they start to drift apart, the current trade may consolidate or exhibit a reverse pattern.
Some of the features of the Patternsmart Thinkorswim RSI divergence indicator include:
- Alerts: gives both audio and message alerts when a divergence is found. This can be toggled on or off.
- Length 1 & 2: This is defined as the range of bars used to calculate the recent High and previous High.
- RSI_Mode: “Upper” draws signal arrows on the price chart. “Lower” draws it as an RSI indicator with divergence signals.
- Percent: The difference between High1 and High2, see image below
- RSI_Percent: The difference between RSI1 and RSI2.
- Parameters of RSI: You can change the inputs of RSI indicators.
When set up the indicator will look like this:
RSI Divergence Indicator on Thinkorswim: Paid version from Thinkindicators
There is also another paid version, this time from Thinkindicators
The author includes bullish and bearish scans and it will work on any time frame.
However the problem is that the link to buy it is broken at the time of writing on July 26th 2022.
Here is a screenshot of it using Apple AAPL.
RSI Divergence Indicator on Thinkorswim: Paid version from TradEdge Coding
This version available from TradEdge Coding costs $100. The indicator paints arrows when a divergence occurs, they are real time and do not repaint. There is also a histogram to help.
It can be used for the stock market, Forex or futures, and works on any time frame.
When running it will look like this:
Importance of RSI Divergence Indicator to Traders
RSI divergence presents an advantage to traders by showing the relative strength index at a lower high when the price uptrend hits higher highs.
At the same time, it will hit lower lows with divergence when the price is trending downward. In both indicators, whether traveling downwards or upwards, the RSI is starting to diverge from the current stock price.
Divergence denotes that the current price trend is flagging, and this provides insight to traders as to whether to make a move to buy or sell this stock.
When the indicator starts to disagree with the chart, it is a sign that there are upcoming changes in the chart.
An obscure bullish divergence means a continuation of an upswing. You will notice this on the trend lines when the RSI indicators make lower than the current price.
Conversely, a hidden bearish divergence occurs when the stocks are showing a downtrend. This trend will most likely go on when you notice that the RSI hits a higher high than the lower high of the price.
In both cases, an RSI divergence indicator on Thinkorswim will provide you with the information you need to make an informed decision in your trading.
Understanding the Role of RSI
It is hard to understand RSI divergence when you don’t know what RSI means. This acronym stands for relative strength index, which helps measure the direction and momentum of a specific stock.
What it generally does is look at the gains and losses over 14 days. Some traders prefer to have it for shorter or longer periods, depending on the circumstances.
The RSI indicator increases when a stock increases in value and decreases when the opposite happens. It is measured on a scale of 0 to 100.
When the RSI drops below 30, it means the stock is oversold and has been experiencing a downtrend lately. On the other hand, if the RSI is 70 or above, it indicates the stock is now on an uptrend and is now oversold.
To compute the RSI, you need to divide the average gain over a period by the average loss over the same period. Add one and divide the result into 100. Subtract the number from 100, and that result is the RSI.
Here is an example. If you have an average gain of 50 over 14 days and an average loss of 20 over the same period, your equation will look like this:
100-100/(1+5-/20) = 100 -100/1+2.5 = 100 - 28.57 + RSI of 71.43
In general, those who advocate for RSI divergence indicators recommend selling stocks when the RSI exceeds 70 and buying when the RSI drops below 30.
But these numbers are not set in stone and are only guidelines in trading. RSI is better when used as a secondary indicator to support a primary buy and sell indicator.
How to Use RSI Divergence on Thinkorswim
RSI divergence indicator is primarily used to determine when is the best time to sell as the stock price will most likely drop or when you see a trend reversal.
The purpose of divergence is to spot when the price indicator trend is moving into opposite directions.
To spot the negative divergence:
- you need to locate the High1 and its RSI1 value within a given range (Length1).
- Second, we find the previous High2 and RSI2 value within a given range (Length2).
- Then you compare the ratio of these two Highs and RSI values to determine if the set percentage is met.
- If both percent conditions are met, the red arrow will be pointing downward.
In positive divergence:
- The indicator will find the recent Low1 and its RSI1 value within a given range (Length1).
- Then, it will look for the previous Low2 and its RSI2 value within a given range (Length2).
- And if both percent conditions are met, the green arrow will be pointing upward.
To take advantage of its benefits, the RSI divergence indicator should be used in combination with other technical analysis strategies for a sound decision on a specific investment.
An RSI divergence indicator on a trading platform such as Thinkorswim is a great way to ensure that you are not wasting time on your skill sets that you don’t have and instead focus on what you are good at - trading and making money.
You might be also interested in what is Laguerre RSI? and also the Supertrend indicator on Thinkorswim.