Unsure about buying the dip? This key trading indicator makes it easier

crypto list


When an asset enters a bear part and the headlines are damaging, analysts undertaking additional draw back, and the sentiment shifts from optimism to pure gloom and doom. This leads to panic gripped merchants dumping their positions close to the underside of the downtrend as an alternative of shopping for. 

How can merchants go towards the herd and construct the braveness to purchase in a bear market? It is just not simple as a result of in the event that they buy too early, the place might shortly flip right into a loss. However, in the event that they anticipate too lengthy, they could miss the early a part of the rally.

Although pulling the set off throughout a bear part is tough, the relative energy index (RSI) indicator can establish market bottoms and favorable threat to reward eventualities.

Let’s evaluate just a few examples of when to purchase in a bear market.

Look for terribly oversold ranges on the RSI

BTC/USDT each day chart. Source: TradingView

Bitcoin (BTC) topped out near $20,000 in December 2017 and began an extended gut-wrenching bear market that bottomed out close to $3,300 in December 2018. During this era, the RSI entered the oversold territory (a studying under 30) on 5 events (marked as ellipses on the chart).

In the primary 4 situations, the RSI dipped near or simply under the 30 degree however in the course of the fifth time, the RSI dropped to 10.50. This is an indication of capitulation the place merchants who had been shopping for pre-empting a backside or had held their positions within the bear market succumbed to worry and purged their holdings.

Usually, lengthy bear markets finish after extended durations of fear-based promoting. Smart merchants anticipate these alternatives and purchase when the markets are deeply oversold, like when the RSI under 20.

BTC/USDT each day chart. Source: TradingView

Fast ahead to 2019 and 2020 when the RSI dipped shut to twenty on two events and dropped to fifteen.04 on March 12, 2020.

The first occasion when the pair dropped to 19.60 on Sep. 26, 2019, turned out to be a shedding commerce as a result of the value made a brand new native low weeks in a while Oct. 23, 2019. This exhibits that merchants ought to be prepared to shut their positions when the stops hit as a result of in the event that they don’t try this, the losses might continue to grow.

On Nov. 24, 2019, the RSI dropped to 22.32, simply above the 20 degree. For merchants who maintain a really tight cease, this might have additionally turned out to be a shedding commerce with the drop on Dec. 18, 2019. However, these had been all small losses, which might not make a dent to the portfolio until merchants had been utilizing heavy leverage.

The RSI plunged to fifteen.04 on March 12, 2020, and merchants who had been courageous sufficient to purchase after this drop would have made outsized good points had they held onto their positions in the course of the bull part, which topped out at $64,854 on April 14, 2021. This exhibits how after two shedding purchases, merchants finally hit the jackpot utilizing the RSI sign.

Combining the RSI with transferring averages produces a greater sign

During Ether’s (ETH) bear part in 2018, there have been 4 situations when the RSI dipped under or got here near the 20 degree. The first alternative supplied a powerful return to merchants however the different two situations turned out to be losers.

To keep away from whipsaws, merchants might add further filters to maintain them out of shedding trades. One easy instance could possibly be that as an alternative of shopping for simply after the RSI drops under 20, merchants might anticipate the value to shut above the 20-day exponential transferring common for 3 successive days earlier than buying.

ETH/USDT each day chart. Source: TradingView

As seen within the chart above, the sign to purchase in April 2018 triggered because the ETH/USDT pair rose above the 20-day EMA after dropping under the 20 degree on the RSI. This commerce turned out to be worthwhile because the pair witnessed a pointy up-move.

The subsequent purchase sign in August didn’t meet the standards as a result of the value didn’t rise above the 20-day EMA for 3 consecutive days. The third commerce in September would have was a minor loss however the one in November would have made an enormous revenue.

Bullish divergences and the way to spot them

Another necessary instrument that may assist warn merchants of a potential development reversal is a bullish divergence. This occurs when the value continues to fall however the RSI makes larger lows, indicating the bearish momentum could possibly be weakening.

LTC/USDT each day chart. Source: TradingView

Litecoin (LTC) exhibits the formation of two bullish divergences in the course of the 2018 bear part. The first divergence that shaped from August to September of 2018 turned out to be a false sign as a result of the value didn’t rise above the swing excessive.

However, the second bullish divergence from November to December of 2018 turned out to be a worthwhile sign proper on the backside, which was adopted by a pointy rise inside the subsequent few days.

ETC/USDT each day chart. Source: TradingView

Another instance of a barely longer bullish divergence might be seen in Ethereum Classic (ETC) from September to December 2019. During the interval, the value made decrease lows however the RSI shaped larger lows. The ETC/USDT pair surged within the subsequent few days after it broke above the swing excessive.

VET/USDT each day chart. Source: TradingView

VeChain (VET) additionally confirmed the formation of a bullish divergence from September 2020 to October 2020, which was adopted by an enormous bull run. This exhibits the bullish divergence is a great tool, which if used correctly can profit the merchants immensely.

Some necessary takeaways

Bear markets supply the chance to purchase an asset at a big low cost however it’s not simple to buy when everyone seems to be promoting and the sentiment is damaging.

However, merchants who use the RSI can develop an edge. An extraordinarily oversold studying on the RSI is an indication of capitulation, which usually marks the top of a bear part. This technique might help merchants pull the set off when it issues.

Sometimes, the RSI might give false indicators, therefore, merchants can use extra filters like each day closes above the 20- and 50-day transferring common to keep away from whipsaw trades. Spotting bullish divergences also can alert merchants {that a} downtrend could also be ending.

The views and opinions expressed listed below are solely these of the writer and don’t essentially replicate the views of Cointelegraph.com. Every funding and buying and selling transfer entails threat, you need to conduct your individual analysis when making a choice.