RSI divergence swings
RSI divergence is one of the most quoted reversal signals in technical analysis: price makes a new low but momentum does not, or price makes a new high while RSI fails to. This version trades it on hourly NIFTY futures bars, waits until each swing point is confirmed so the signal cannot repaint, and holds the position positionally with a 2% stop and a 4% target.How it trades
Results
PRE-BUILT · DEFAULTSWhere it made and lost money
With 19 trades, most conditions have too few trades to judge. Two splits have enough. Entries made after India VIX closed above 14.5 earned ₹31,207 over 8 trades, more than calmer days, since divergences after a volatile fall had room to rebound 4%. Trades opened on sessions that closed above their open made ₹1,27,209 over 11 trades, while those opened on down sessions lost ₹62,451 over 8. In practice the year's profit came from long trades that caught rallies; the small samples on trend direction and holding-period moves point the same way but cannot be read as a rule.
About this strategy
- Build 60-minute bars of the near-month NIFTY future from 09:15, joined across sessions and adjusted for the price jump at each monthly roll. Compute RSI(14) on them.
- A swing low is a bar whose low is below the five bars on either side; it is only known once the fifth bar after it has closed. Swing highs are the mirror.
- Bullish divergence: a newly confirmed swing low is lower than the previous swing low, but RSI at it is higher. Buy one lot of the future at the next tick.
- Bearish divergence: a new swing high above the previous one with a lower RSI. Sell one lot.
- Exit at a 2% loss or a 4% gain on the entry price, whichever comes first. There is no time exit.
- On the monthly futures expiry, an open trade is closed at 15:15 and reopened in the next month at the next open, with the stop and target still counted on the whole trade.
- Only one position at a time; signals that arrive while a trade is open are ignored.
Why traders use it
Divergence suggests the push behind a move is fading even though price has not yet turned, so it offers an early entry against a tired trend. The 2:1 target-to-stop ratio means the strategy can be wrong more often than right and still come out ahead. Hourly bars filter out intraday noise while keeping enough signals in a year, and confirming swings before acting avoids the repainting problem that makes many chart-based divergence indicators look better than they are.
The year in plain words
On NIFTY futures from 1 Oct 2025 to 30 Sep 2026 with default settings, the strategy logged 19 trades (each monthly roll counts as a separate trade) and won 42% of them, making ₹64,758 before costs with a profit factor of 1.25. The swings were large: the best trade made ₹81,915 in October, while September lost ₹86,210 and the maximum drawdown reached ₹96,283. Seven trades ended at the 2% stop, four at the 4% target and seven at a monthly roll. After ₹20 per order and bid-ask slippage the profit was ₹46,556. The year's profit came from a few big wins.
What the settings do
Risks
- A 2% stop on one NIFTY futures lot is a large loss per trade: six of the seven stopped trades in this test lost ₹30,000 or more, the largest ₹55,906.
- Positions are held overnight and over weekends, so gaps can fill the stop well beyond 2%.
- With about 19 trades a year, one or two outcomes decide the result; the year's best trade alone exceeded the total profit.
- Counter-trend entries in a strong trend can be stopped out several times in a row.
Who it suits
Swing traders with margin for a NIFTY futures position held for days, who can tolerate drawdowns near ₹1 lakh per lot and long gaps between signals. It fits those who prefer few, rule-based trades to daily intraday activity.
Questions traders ask
What is RSI divergence?
Bullish divergence is when price makes a lower low but RSI makes a higher low, hinting that selling pressure is weakening. Bearish divergence is a higher price high with a lower RSI high. Traders read both as early signs that the current move may reverse.
Is the RSI divergence strategy profitable on NIFTY?
In this backtest on NIFTY futures from 1 Oct 2025 to 30 Sep 2026 it made ₹64,758 before costs and ₹46,556 after ₹20 per order and bid-ask slippage, but with a maximum drawdown of ₹96,283 and only 19 trades. Statutory charges were excluded. Past results do not guarantee future ones.
Why does RSI divergence repaint on charts?
Many chart scripts mark a swing low as soon as a bar looks like the lowest, then move or delete the mark if price goes lower. That makes past signals look cleaner than they were in real time. This version only acts once five bars after the swing have closed, so every signal was known at the time of entry.
Which timeframe is best for RSI divergence?
There is no single answer; this backtest uses 60-minute bars as a middle ground between noisy intraday swings and rare daily ones. You can change “Bar minutes” and “Swing window” to test other timeframes and see how the number and quality of signals change.