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23 June 2021

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

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

smart summary beta

How can traders go against the herd and build the courage to buy in a bear market.

Bitcoin (BTC) topped out close to $20,000 in December 2017 and started a long gut-wrenching bear market that bottomed out near $3,300 in December 2018.

This is a sign of capitulation where traders who had been buying pre-empting a bottom or had held their positions in the bear market succumbed to fear and purged their holdings.

Smart traders wait for these opportunities and buy when the markets are deeply oversold, like when the RSI below 20.

This shows that traders should be ready to close their positions when the stops hit because if they don’t do that, the losses may keep growing.

The RSI plunged to 15.04 on March 12, 2020, and traders who were brave enough to buy after this drop would have made outsized gains had they held onto their positions during the bull phase, which topped out at $64,854 on April 14, 2021.

During Ether’s (ETH) bear phase in 2018, there were four instances when the RSI dipped below or came close to the 20 level.

One simple example could be that instead of buying just after the RSI drops below 20, traders may wait for the price to close above the 20-day exponential moving average for three successive days before purchasing.

Another important tool that can help warn traders of a possible trend reversal is a bullish divergence.

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.

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