By Adam Sharp
When crypto volatility is high (like it is now), buying digital coins can be intimidating.
How can the average person hope to time the market correctly?
If you guess blindly, you may buy a cryptocurrency only to watch it drop 25% over the next week.
That’s why I use technical analysis (TA) to help time buys. It works perfectly well with cryptocurrencies.
The most commonly used TA tool in crypto, the relative strength index (RSI), is famous for its simplicity.
It’s a momentum indicator that uses a rating scale of 1 to 100.
Anything over 70 is overbought (expensive).
Anything under 30 is oversold (cheap).
RSI measures recent momentum, typically over a 14-day period. It gives you a very simple way to judge whether a coin is relatively cheap or expensive.
Let’s take a look at a real-world example.
Over the last year, bitcoin entered “oversold” territory three times (on a 12-month chart)…
July 16, 2017 – RSI hit 30, bitcoin price was $1,978 (pullback from $2,800)
September 14, 2017 – RSI hit 30, bitcoin price was $3,849 (pullback from $4,900)
February 6, 2018 – RSI hit 32, bitcoin price was $6,948 (pullback from $19,000).
RSI can be a great tool for spotting dips in bitcoin. (This week’s chart shows the September 14 and February 6 “oversold” triggers.)
As I write, on March 17, 2018, bitcoin has an RSI value of 51, meaning it’s neutral at the moment.
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Buying When It’s Terrifying
Buying crypto during a pullback can be hard to do. But you know it’s a better time to buy than when the price is far higher, even though all the news headlines are negative. For many people, it’s hard to pull the trigger in this environment.
By using a tool like RSI to gauge whether a coin is at a favorable price, we can remove the emotion from buying decisions.
You can make these types of charts for yourself online with TradingView. You’ll need to sign up for a free account, then click the “Interactive Chart” button on the graph. Then under “Indicators,” select “Relative Strength Index.”
However, if you’re new to charting, understand that these tools aren’t magical – they take practice to use properly. It’s also important to know that the time period you’re looking at will affect the data. I’m a long-term investor, so I tend to look at longer periods (a couple of months to a year).
If you’re looking at a short-term chart, there will be more frequent “oversold” and “overbought” triggers. These can be useful if you don’t want to wait a long time before buying.
Due to recent increased market volatility, I’ll be paying more attention to the technical side of crypto over the coming weeks, especially in my Crypto Asset Strategies service. Keep an eye out for that.
It’s a fascinating area, and from what I’ve seen so far, TA may actually be more useful for crypto than it is for stocks.
The reason for this may be that a majority of stock volume these days is driven by robo-trading (large algorithmic or “quant” funds), …read more
Source:: Investment You
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