Chapter 27 · Oscillators
Divergence, failure swings and the settings that matter
The highest-value oscillator reading, its worst failure mode, and how period choice changes everything.
RSI and the two thresholds
Threshold readings — above 70, below 30 — are the most quoted and least useful thing an oscillator produces. Divergence and failure swings are where the information is.
The four divergences
| Type | Price | Oscillator | Conventional reading |
|---|---|---|---|
| Regular bearish | Higher high | Lower high | Advance losing force |
| Regular bullish | Lower low | Higher low | Decline losing force |
| Hidden bearish | Lower high | Higher high | Continuation of a downtrend |
| Hidden bullish | Higher low | Lower low | Continuation of an uptrend |
Regular divergence suggests a reversal; hidden divergence suggests continuation. Most people learn only the first two and then find the indicator 'wrong' during strong trends, when hidden divergence is what is actually present.
Worked: reading a regular bearish divergence
| First peak | Second peak | |
|---|---|---|
| Price | Rs 505 | Rs 528 |
| RSI(14) | 76 | 68 |
- Price made a higher high; RSI made a lower high. That is regular bearish divergence.
- What it actually says: the rate of advance into the second peak was lower than into the first. Nothing more.
- It does not say the top is in. Divergence can persist through several higher highs in a powerful trend.
- It is a reason to tighten risk, not a signal to sell short. Traders who short every divergence in a strong uptrend lose consistently.
Failure swings — Wilder's own preferred signal, largely forgotten
- 1In an uptrend: RSI rises above 70, falls back, then fails to exceed its prior peak on the next rally, and finally breaks its intervening low.
- 2In a downtrend: the mirror image below 30.
- 3The advantage over divergence is that a failure swing has a defined trigger — the break of the intervening RSI low — rather than being a judgement about two peaks.
Period length changes the reading entirely
| RSI period | Behaviour | Suits |
|---|---|---|
| 7 | Reaches extremes constantly | Short holding periods, more false readings |
| 14 | Wilder's default | The convention almost everyone plots |
| 21 | Rarely reaches 70 or 30 | Longer horizons; extremes become meaningful |
A stock that 'never gets oversold' on RSI(21) may be oversold constantly on RSI(7). Before comparing your reading with anyone else's, check you are plotting the same period.
MACD, signal line and histogram
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