Mastering Bearish Divergence in Pine Script: A Step-by-Step Coding Guide

Bearish divergence is a crucial concept in technical analysis that signals a potential reversal in an upward trend. By identifying this pattern, traders can make informed decisions to protect their investments or capitalize on upcoming price declines. Using Pine Script on TradingView, you can automate the detection of bearish divergence, enhancing your trading strategy. This article provides a comprehensive step-by-step guide on setting up your Pine Script environment, identifying pivot points, coding the logic for bearish divergence detection, and includes complete example code with detailed explanations.

Step 1: Setting Up the Pine Script Environment

To begin coding in Pine Script, follow these steps:

Create a TradingView Account: If you haven’t already, sign up for a free account at TradingView.

Open the Pine Editor: Once logged in, navigate to any chart and click on the "Pine Editor" tab at the bottom of the screen. This is where you will write your Pine Script code.

Version Declaration: Start your script by declaring the version of Pine Script you will be using:

//@version=5

Step 2: Identifying Pivot Points for Bearish Divergence

Bearish divergence occurs when the price makes higher highs while a momentum indicator fails to confirm this trend by making lower highs. 

To identify these pivot points:

Define the Lookback Period: Choose how many bars back you want to check for pivot points. A common choice is 14 bars.

Identify Price Highs: Use the highest function to find the highest price over the specified lookback period.

Identify Oscillator Highs: Similarly, calculate the highest value of your chosen oscillator (like RSI or MACD) over the same period.

Step 3: Coding Logic for Bearish Divergence Detection

Now that you have identified pivot points, you can code the logic to detect bearish divergence:

Calculate the Oscillator: For this example, we’ll use the RSI:

rsiLength = 14

rsiValue = ta.rsi(close, rsiLength)

Detect Higher Highs in Price:

priceHigh = ta.highest(high, rsiLength)

Detect Lower Highs in RSI:

rsiHigh = ta.highest(rsiValue, rsiLength)

Check for Divergence:

bearishDiv = (high > priceHigh[1]) and (rsiValue < rsiHigh[1])

Example Code: Complete Pine Script for Detecting Bearish Divergence

Here’s the complete example code for detecting bearish divergence:

//@version=5

indicator("Bearish Divergence", overlay=true)

// Parameters

rsiLength = 14

priceHigh = ta.highest(high, rsiLength)

rsiValue = ta.rsi(close, rsiLength)

rsiHigh = ta.highest(rsiValue, rsiLength)

// Detect Bearish Divergence

bearishDiv = (high > priceHigh[1]) and (rsiValue < rsiHigh[1])

// Plotting

plotshape(bearishDiv, style=shape.labeldown, location=location.abovebar, color=color.red, size=size.small, text="Bearish Divergence")

Explanation of Each Code Segment

Indicator Declaration: The indicator function sets the name and overlay options for your script, allowing it to be displayed on the price chart.

Parameters: The rsiLength variable defines the lookback period for the RSI and price analysis.

Price and RSI Calculations: The ta.highest function identifies the highest price and RSI values over the defined lookback period.

Divergence Logic: The bearishDiv variable checks if the current high is greater than the previous high while the RSI is lower than its previous high, indicating bearish divergence.

Plotting: The plotshape function visually marks the bearish divergence on the chart with a red label above the bar.

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Conclusion

Coding bearish divergence in Pine Script is an invaluable skill for traders looking to automate their analysis and improve their trading strategies. By following this step-by-step guide, you can easily set up your Pine Script environment, identify pivot points, and implement the logic for detecting bearish divergence. With the provided example code, you can start analyzing your charts for potential selling opportunities, enhancing your trading toolkit and decision-making process. Embrace the power of Pine Script, and take your trading to new heights!