This renders the term somewhat ambiguous and subject to the interpretation of the user. Sometimes, the RSI may give false signals, hence, traders can use additional filters like daily closes above the 20- and 50-day moving average to avoid whipsaw trades. Spotting bullish divergences can also alert traders that a downtrend may be ending.
Another important tool that can help warn traders of a possible trend reversal is a bullish divergence. This happens when the price continues to fall but the RSI makes higher lows, indicating the bearish momentum could be weakening. During Ether’s (ETH) bear phase in 2018, there were four instances when the RSI dipped below or came close to the 20 level. The first opportunity offered a strong return to traders but the other two instances turned out to be losers. It also helps to map out your strategy on a price chart so you can see where to buy and, if necessary, where to exit the trade. Deepen your knowledge of technical analysis indicators and hone your skills as a trader.
Look for extremely oversold levels on the RSI
This will have proven beneficial for most of the last 10 years, but the problem is that one may not know that the long-term trend has broken until the index has gone down say 20%. That means that the investor would take a loss on purchases made at the -10% level when the trend finally breaks into a downtrend. A 50-day moving average plots the average of prices over the last 50 trading days. If the average price is falling, then it indicates a downtrend. To avoid whipsaws, traders may add extra filters to keep them out of losing trades.
Karl Montevirgen is a professional freelance writer who specializes in the fields of finance, cryptomarkets, content strategy, and the arts. Karl works with several organizations in the equities, futures, physical metals, and blockchain industries. He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts. These are just a couple of the many ways to buy falling assets.
Bull or bear, these charts will tell you!
For someone who is looking to trade or invest in concert with market cycles, buying the dip would just be one part of the strategy—acquire stocks in or near the trough in the cycle. The other part of the strategy—“sell the rip”—refers to selling stock at an assumed peak in the cycle. To “buy the dip and sell the rip” describes a complete timing strategy for an investor who is interested in trading the cycles. As you can see in figure 3, traders sometimes use the 50-day moving average as a buy point.
During the period, the price made lower lows but the RSI formed higher lows. The ETC/USDT pair surged in the next few days after it broke above the swing high. As seen in the chart above, the signal to buy in April 2018 triggered as the ETH/USDT pair rose above the 20-day EMA after dropping below the 20 level on the RSI. This trade turned out to be profitable as the pair witnessed a sharp up-move. On Nov. 24, 2019, the RSI dropped to 22.32, just above the 20 level. For traders who keep a very tight stop, this would have also turned out to be a losing trade with the drop on Dec. 18, 2019.
Catching the dip on a rising trend
The strategies just discussed are pretty basic, but they’re simple enough to help you get started. It goes without saying that a stock that’s crashing due to internal mismanagement, exceedingly high debt, an inability to generate revenue, and unpromising prospects may not be the smartest dip to buy. In contrast, a falling stock whose company financials are reasonably sound makes for a better case of a bargain buy.
- During this period, the RSI entered the oversold territory (a reading below 30) on five occasions (marked as ellipses on the chart).
- Well, I often had arguments in online forum with a guy who claimed to time the market perfectly without any technical analysis or prior experience.
- The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com.
- Shawn Lee has over eight years of experience in the financial market
as a market analyst.
The goal of these arrows is to force the traders to scale in & out of trades which is in my opinion crucial when… Bear markets offer the opportunity to buy an asset at a significant discount but it is not easy to purchase when everyone is selling and the sentiment is negative. Litecoin (LTC) shows the formation of two bullish divergences during the 2018 bear phase. The first divergence that formed from August to September of 2018 turned out to be a false signal because the price did not rise above the swing high.
Understanding Market Cycles
VeChain (VET) also showed the formation of a bullish divergence from September 2020 to October 2020, which was followed by a huge bull run. This shows the bullish divergence is a useful tool, which if used wisely can benefit the traders immensely. Another example of a slightly longer bullish divergence can be seen in Ethereum Classic (ETC) from September to December 2019.
‘Buying The Dip’: What It Means & How To Do It
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision. The good news is that there are ways to reduce your risk so that your potential upside may be greater than your downside.