Well, let's take a look.
When prices move lower rapidly and the indicator(s) gets oversold, some of the best rallies occur when they bounce back. These trade opportunities are the so-called "oversold bounces".
Usually, these oversold bounces can be very lucrative to take advantage of when you can trade them actively and manage your risk well.
There are a few ways to trade oversold bounces but here is my take on how to trade them with a recent trade example on VEN/BTC (Binance)
On March 1st and again on March 3rd VEN/BTC got oversold, meaning the hourly was < 30 (25 and 21) after being on a downtrend for several days:
As you can see, both bounces had a significant move up (about 14%).
But what's interesting is that the second bounce had a ( ) divergence on both the and the , after prices made a , which usually signals a reversal as well. So in this instance, you had multiple signals an oversold bounce is likely to come.
But why at these levels? Is there are a reason why VEN/BTC did bounce on these two levels so significantly?
Well if we take a broader look at the 4-hour chart:
You can see that these levels where previous (support) areas where VEN/BTC have bounced from previously as well.
So in summary, what to look for when trading an oversold bounce:
1. After a runup, prices have retraced and are in a clear downtrend. Also, haven't touched or reached the (50) for quite some time.
2. indicator < 30. Usually the lower the , the bigger the expected bounce. This is why I prefer an < 25.
3. Ideally, you want prices to be at or close to (key) support levels.
4. And if you have a ( ) divergence in the and/or indicators, then your chances of success will increase significantly.
And as an extra bonus, you can look for double (or triple) bottoms which is an indication of a trend reversal.
Also to take into consideration is the timeframe and the market cap of the coin your trading.
When using longer timeframe you can expect bigger moves/bounces but it will take longer to reach those levels.
And as with the coins market cap, prices of coins that have a large(r) market cap tends to move less and slower compare to smaller cap coins.
This way you can change/set your timeframe accordingly. So for instance, smaller cap coins they usually tend to move more and faster so therefore you can get a good trade or return on a relatively small timeframe, e.g. 15 min.
Conversely, it's better to trade in a longer timeframe when trading a big( ) cap coin cause they tend to move less and slower.
This way you will have a better chance of being in a trade with good enough room for profit, especially with the big( ) cap coins.
So in this case, size does matter ;)
If you found this post informative and helpful, please give a like and or share. Leave a comment if you have any questions.
And until next time, good luck with your trading!