In this quick lesson I will show you how the relative strength index can be used to anticipate potential moves in the market and pick up some nice profits. We will be looking at a Bitcoin/USD chart, I like to use the 30 minute timeframe for gauging momentum when day trading.
This trade setup was easy to spot once the first two lower lows formed on the price action. If you look closely, you can see that price made a big move down from the target resistance and bounced twice, this is where you would draw your first extended trend line.
Do the same thing on the RSI, draw your trend line along the higher lows. You can see where I’ve labeled the RSI signals on the chart.
Once you start to see the peaks diverge (price makes lower highs and lower lows while RSI makes higher highs and higher lows), you start accumulating – this is where risk management strategies are used. The ideal entry would have been signal 2 with roughly a 1% accumulation zone.
For this timeframe we are just looking for a quick trade, so the target is simply the resistance around the $4250 region for roughly 4.4%. When the accumulation zone and laddered sells taken into consideration this could easily be a 5.5%+ trade.
You will also notice that momentum on MACD was also rising against a falling price and the MACD historgram barely went negative before price really started taking off. It was not necessary to use MACD in this trade but you can see how it can help make an additional confirmation.
To recap, there are three main takeaways from this trade:
1. Draw your trend lines
As soon as two peaks form on the price and RSI start drawing your trendlines. Adjust them as more data comes in and watch them take shape before entering a trade. Once you have confluence across multiple signals, start to accumulate by dollar cost averaging your buy orders in small amounts as price falls.
2. Stick to your stop loss
If you look at the chart closely you will see that the trade was a loser at first. The entry was around the falling price label and you can even see that price came right down to the stop loss level but quickly bounced back. The stop loss level was derived from the first wick in the series which is touching the dotted line, above the word “price”.
3. Stay patient
Looking at the number of candles you will notice this trade took many hours to build up prior to the major breakout, take this time to accumulate and confirm your signals. Don’t just go all in at the first signs of divergence, give it time.