Koalafied RSI

// Concept developed from RSI : The Complete Guide by John Hayden

// RSI is regarded as a momentum indicator . 2:1 momentum is associated with RSI values of 66.67 and 33.33 respectfully. In an Uptrend an RSI value of 40 should not be broken and in a downtrend
// a RSI value of 60 should not be exceeded. 4:1 momentum ( RSI values of 80/20) can be associated with extreme market conditions, typically thought of as being Overbought or Oversold.

// Simple divergence provides a strong indication that the preceding trend will resume as soon as the retracement is completed. Multiple long-term divergences (not shown in this indicator)
// increase the likelihood that the preceding trend has ended.

// An Uptrend is indicated when:
// 1. RSI values remain in an 80/ 40 range
// 2. Presence of bearish divergences
// 3. Hidden bullish divergences are seen
// A Downtrend is indicated when:
// 1. RSI values remain in a 60/20 range
// 2. Presence of bullish divergence
// 3. Hidden bearish divergence is seen

// Personal additions to John Haydens concepts are horizontal pivot breaks and diagonal trendline breaks. The 80/20 line color shows the last break of horizontal pivot points , while the rsi
// line changes color with diagonal breaks. Additional support/resistance is shown by 66.67 and 33.33 lines.
Open-source script

In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.

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looks really beautiful
so nice and useful ;)
Will add long divergences in update later, as they're the best for indicating potential reversals. Fairly easy to see on the chart though, can't automate everything....
@TJ_667, Hey there. Great indicator on the works of John and I am familiar with Cardwell's work. However, I have trouble understanding a few parameters and conditions.
1) What does it mean when the RSI line changes from grey to red/blue?
2) Why do the 80 and 20 level change from red to blue and vice versa? Does it signify anything?
3) Faint background colour meaning?
4) What about the blue and red dots?

Appreciate your reply and great work on the indicator!
TJ_667 Bull_Bear003
@Bull_Bear003, Hey cheers, no problem I"ll explain a few. Some of your questions are about additional features I added on top of John's book that I find useful. To note though none of the signals are necessarily entry conditions, they just tell you what the momentum is doing, you have to construct your own market view/alpha. Often the best entries are on pullbacks after a 2:1 momentum change for example though.

1) These are diagonal trendline breakouts that we often use on price, but applied to RSI. Search RSI Diags for other scripts on this.
2) The 80/20 color changes are for horizontal pivot breaks. So if the RSI breaks above a previous high pivot in a bear trend then the color changes to blue. Again market structure analysis usually done on price but on the RSI. You can see that the horizontal levels often pre-empt a state change.
3) Faint background is Bull/Bear state. If the RSI hits a 2:1 up momentum then the market state is considered bullish. The background will stay blue until the RSI drops below 40. In general (from johns book) pullbacks in a bull market will stay above 40. If they break under this then it's showing lack of momentum and more traders taking trades against the trend so background will go silver. Then a 2:1 bearish momentum will change the state to red.
4) By dots I"m assuming you mean the lines at 66.7 and 33.33. In John's book these levels are regarded as additional support and resistance. A bull trend might pull back further than 40 on the rsi but as long as it doesn't break these levels then it may continue or range rather than reverse. They only appear when the rsi moves above 60 or below 40 though.
Thank you so much for the in-depth explanations, TJ.
I appreciate them greatly as I am still trying to grasp the concepts detailed in the book especially with regards to retracement theory and how it works with multiple timeframe analyses (the 13x ratio of lower to high timeframe and vice versa).
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