The Relative Strength Index (RSI) signals when traders should buy the dip

When an asset is entering a bearish period and the news is mostly negative, analysts typically expect further declines and a change of sentiment from optimism to despair. This creates panic, causing traders to sell their positions near the lower end of the downtrend rather than buy.

How can traders compete against the crowd and build courage to buy in a bear market? It’s not easy because buying too early can quickly turn the position into a loss. However, if you wait too long you will miss the first part of the rally.

Although it is difficult to take a long position during a downtrend, the Relative Strength Indicator (RSI) can detect market lows and provide a good RR (risk / reward) ratio.

Here are some examples of when to buy dips in a bear market.

Find oversold places index RSI

BTC / USDT Daily | source: TradingView

Bitcoin hit a high of nearly $ 20,000 in December 2017 and began a sustained bear market that bottomed near $ 3,300 in December 2018. During this period, the RSI has entered the oversold area (below 30) five times (orange ellipse on the chart).

The first 4 cases the RSI fell near or just below the 30 level, but in the fifth case the RSI fell to 10.5. This is a sign of surrender where traders bought before bottoming out or holding their position in a bear market but couldn’t resist the fear and decided to sell.

Typically, longer bear markets end after sustained periods of fear selling. Accordingly, smart traders wait for these opportunities and buy when the market is heavily oversold, such as when the RSI is below 20.

BTC / USDT Daily | source: TradingView

Fast forward to 2019 and 2020, when the RSI fell twice against 20 and fell to 15.04 on 12/3/2020.

The first fall, when the pair fell to 19.6 on September 26, 2019, proved to be a losing deal as the price hit a new local low over the next week (October 23, 2019). This shows that traders should be ready to close the position if the price hits the stops because if they don’t, the losses can still be greater.

On November 24, 2019, the RSI fell to 22.32, just above the level of 20. For traders who set a short stop loss, this would also be a losing business with the downward movement on December 18, 2019. However, these are all small losses that will not affect the portfolio unless the trader is using high leverage.

The RSI fell to 15.04 on March 12, 2020 and traders brave enough to buy after that drop will see excellent profits holding their positions during the bullish phase and the 64,854 high on April 14, 2021 Reach USD. This shows that after 2 lost purchases, the trader finally cracked the jackpot with the RSI signal.

Combining RSI with moving averages creates better signals

During ETH’s decline in 2018 there were 4 cases where the RSI fell below or near the level of 20. The first opportunity brought the trader a strong profit, but the other 2 cases turned out to be a loss.

To avoid losses, traders can add additional filters to prevent losing trades. A simple example could be that instead of buying immediately after the RSI drops below 20, a trader could wait 3 consecutive days for the price to close above the 20-day exponential moving average (EMA) before buying.

ETH / USDT Daily | source: TradingView

As can be seen in the graph above, the buy-signal was triggered in April 2018 when the ETH / USDT pair surged above the 20-day EMA after the RSI fell below the 20 level. This trade was profitable as the pair was profitable after moving.

The next buy signal in August did not meet the criteria as the price did not move above the 20-day EMA for 3 consecutive days. The third trade in September may have been a small loss, but the November trade will be a big gain.

P.Cheering Price Increase And How To Recognize It

Another important tool that can alert traders to a possible trend reversal is bullish divergence. It does so if the price continues to fall but the RSI makes a higher low, suggesting that the downside momentum may ease.

LTC / USDTB Daily | source: TradingView

LTC showed two bullish divergences during the 2018 bear phase. The first divergence that formed between August and September 2018 was a false signal as the price did not rise above the swing high.

However, the second bullish divergence from November to December 2018 was a positive signal at the very bottom, followed by a strong rally over the next few days.

ETC / USDT Daily | source: TradingView

Another example of a slightly longer bullish divergence can be seen in the ETC chart from September to December 2019. During this time the price made a lower low but the RSI made a higher low. The ETC / USDT pair rallied strongly over the next few days after breaking the swing high.

VET / USDTILLION Daily | source: TradingView

Vocational education is also showing a bullish divergence from September 2020 to October 2020, followed by a major rally. This shows that bullish divergences are a useful tool and, if used wisely, can be of great use to traders.

Some important things

The bear market offers an opportunity to buy assets at a significant discount, but it’s not easy to buy when everyone is selling and sentiment is negative.

However, traders who use RSI can have an advantage. The RSI, which is deep in the oversold territory, is a sign of surrender that usually marks the end of a bear period. This strategy can help traders place orders.

Sometimes the RSI can give false signals so traders can use additional filters such as daily closings above the 20 and 50 day MA to avoid trading losses. Recognizing a bullish divergence can also warn that a downtrend is ending.

Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions.

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