Hi HIVIANs,
I hope you survived the recent crypto selloff!
I checked the BTC/USDT chart (4 hour timeframe) and I see a possible bullish divergence!
Of course we need to wait until the candle is finally closed but if things stay like on the current chart, there should be a big buying signal!
What is a divergence?
A divergence is a disagree in between an indicator and the price.
In this case, the (potential) divergence is between the RSI indicator and the price!
There is no gurantee that an divergence actually gets priced in!
But it's an important and useful tool to spot potential price reversals/continuations!
Divergences - examples:
Trend reversal divergences
- Bullish divergence: Price is falling while indicator is rising within oversold area -> potential bullish reversal within a downside movement
- Bearish divergence: Price is rising while indicator is falling within overbought area -> potential bearish reversal within an upside movement
Trend continuation divergences:
- Hidden bullish divergence: Price is rising while indicator is falling within oversold area -> potential bullish continuation within an upside movement
- Hidden bearish divergence: Price is falling while indicator is rising within overbought area -> potential bearish continuation within a downside movement
Where does the "oversold"/"overbought"-area start for the RSI?
This is depending on which market you are trying to analyze!
The rule of thumb is:
- Traditional markets: RSI > 70 = overbought; RSI < 30 = oversold
- Crypto markets: RSI > 80 = overbought; RSI < 20 = oversold
This rule of thumb gave me a professional trader a few years ago. The reason was the high volatility in crypto markets compared to traditional markets.