This article proposes a Rayleigh’s quotient–based damage detection algorithm. It aims at efficiently revealing nascent structural changes on a given structure with the capability to differentiate between an actual damage and a change in operational conditions. The first three damage detection levels are targeted: existence, location, and severity. The proposed algorithm is analytically developed from the dynamics theory and the virtual energy principle. Some computational techniques are proposed for carrying out computations, including discretization, integration, derivation, and suitable optimization methods. Field implementation strategies are also considered for the purpose of online damage monitoring. In order to prove the efficiency of this strategy, one experimental and three numerical case studies were conducted. The proposed algorithm successfully detected the damage in all simulated cases and estimated the damage severity with acceptable accuracy. The conclusion is that the proposed algorithm was able to efficiently detect damage appearance in a range of structures for various damage levels and locations, and under different operational conditions.