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

When an asset enters a bear part and the headlines are adverse, analysts challenge additional draw back, and the sentiment shifts from optimism to pure gloom and doom. This ends in panic gripped merchants dumping their positions close to the backside of the downtrend as an alternative of buying. 

How can merchants go in opposition to 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 could rapidly flip right into a loss. However, in the event that they look ahead to too lengthy, they could miss the early a part of the rally.

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

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

Look for very oversold ranges on the RSI

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BTC/USDT every 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 first 4 cases, the RSI dipped near or simply under the 30 stage however throughout the fifth time, the RSI dropped to 10.50. This is an indication of capitulation the place merchants who had been buying pre-empting a backside or had held their positions in the bear market succumbed to worry and purged their holdings.

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

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BTC/USDT every 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 dropping commerce as a result of the value made a brand new native low weeks afterward 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 could continue to grow.

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

The RSI plunged to fifteen.04 on March 12, 2020, and merchants who have been courageous sufficient to purchase after this drop would have made outsized good points had they held onto their positions throughout the bull part, which topped out at $64,854 on April 14, 2021. This exhibits how after two dropping purchases, merchants ultimately 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 cases when the RSI dipped under or got here near the 20 stage. The first alternative supplied a robust return to merchants however the different two cases turned out to be losers.

To keep away from whipsaws, merchants could add additional filters to maintain them out of dropping trades. One easy instance may very well be that as an alternative of buying simply after the RSI drops under 20, merchants could look ahead to the value to shut above the 20-day exponential transferring common for 3 successive days earlier than buying.

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ETH/USDT every day chart. Source: TradingView

As seen in the chart above, the sign to purchase in April 2018 triggered as the ETH/USDT pair rose above the 20-day EMA after dropping under the 20 stage on the RSI. This commerce turned out to be worthwhile as 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 become a minor loss however the one in November would have made an enormous revenue.

Bullish divergences and the way to spot them

Another vital software that may assist warn merchants of a attainable pattern reversal is a bullish divergence. This occurs when the value continues to fall however the RSI makes larger lows, indicating the bearish momentum may very well be weakening.

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LTC/USDT every day chart. Source: TradingView

Litecoin (LTC) exhibits the formation of two bullish divergences throughout the 2018 bear part. The first divergence that fashioned 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 at the backside, which was adopted by a pointy rise inside the subsequent few days.

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ETC/USDT every day chart. Source: TradingView

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

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VET/USDT every 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 useful gizmo, which if used correctly can profit the merchants immensely.

Some vital takeaways

Bear markets provide the alternative to purchase an asset at a big low cost however it is just not simple to buy when everyone seems to be promoting and the sentiment is adverse.

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

Sometimes, the RSI could give false alerts, therefore, merchants can use further filters like every day closes above the 20- and 50-day transferring common to keep away from whipsaw trades. Spotting bullish divergences can even 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 trading transfer includes threat, you need to conduct your personal analysis when making a choice.