Oversold Stock: What Does It Means?

A lot of traders want to know about the oversold stock meaning. The meaning is basic when buying and selling stocks. It is basic because maybe it is time to buy mode.

Want to learn what does oversold stock mean? An oversold stock is a stock that may go up soon, considering that it has traded lower for a considerable period. Often, this stock is near solid support and is about to go up, giving traders a trading opportunity.

Including:

  • What is an oversold stock?
  • Should I buy oversold stock?
  • The risk of oversold indicators
  • Stock oversold indicators
  • An example strategy

When I started trading, I did a lot of research on the web to look for stock trading systems for any market condition.

I often read about oversold stocks, and I became interested in it to improve my trading.

Well, what did I learn?

I found it interesting that most of the tutorials out there talk about moving average indicators (or lagging indicator).

Other trading websites tell us to buy low and sell high, and the best way to do it is through oversold stocks using an oversold level.

However, how do you do it?

What can you use on stock trading to find oversold stocks?

Well, it turns out that it is difficult to find an oversold market for trading.

Also, if you search Google, you will confuse yourself with so much information out there to understand what is real.

You’ll find out that RSI and Stochastic Oscillator are standard in discussions online. Also, stochastic oscillator is a standard for buying stocks.

Well, it is true if you do your research to see for yourself.

Okay, I believe RSI is better than the second one to find oversold stocks.

Based on my experience, I use the 2-period RSI to get oversold stock signals.

Later on, I will show you how to use it to scan for high probability trading set-ups.

Also, I use MACD in the stock market sometimes to look for these kinds of stocks.

However, I like RSI on my trading to detect an oversold condition.

You should use one or two indicators only to simplify your trading system.

I did it, and I can see favorable results to continue doing it.

Okay, let’s talk about RSI in this post first, and then I’ll show how to use MACD to find oversold stocks.

I will skip the stochastic indicator in this tutorial to simplify everything. It is a technical indicator which I do not recommend because of not having much success.

How to tell if a stock is oversold?

Using the RSI indicator is one way to tell if a stock has been trading oversold. For example, when the cumulative RSI is below five, the stock may already show signs of reversal from the temporary pullback. Because there are already signs of reversals, it time to watch for momentum signal before taking a trade.

What is an oversold stock?

An oversold stock has the potential of the price to bounce because it has traded lower too much. (Source)

However, the stock can stay oversold for some time, and be careful in buying these kinds of stocks to reduce your losses.

What does an oversold stock mean?

When the indicator shows a signal, it does not mean that it is 100% accurate to predict the market move.

Value investors like buying these oversold stocks in the market because the price is usually under the perceived value.

However, they use fundamental analysis to select the best stocks.

For short-term traders, they often use technical indicators on the chart to determine if the stock has oversold.

Also, they have other indicators on the chart to confirm the signals.

The default theory is “a stock has oversold if RSI is below 30 and overbought if above 70.”

An overbought stock is a sell signal which is the opposite of being oversold.

Johndeo

However, I don’t believe it when I used it because I experienced a lot of bad trades.

Well, I don’t use that strategy anymore in stock trading to avoid more losses.

According to Zacks.com, there are many reasons the stock becomes oversold.

In stocks with a lower value than it should, you’ll have a buying opportunity to generate profits.

You can use the Relative Strength Index Indicator on the stock chart to look for oversold stocks.

It is a common way of doing it to receive a buying signal.

Well, I use RSI after market hours to prepare my set-ups before the next market open. (Source)

However, I use another uptrend indicator when I’m confirming a trade.

For example, a simple moving average indicator can help you determine if a stock is bullish.

I use the 200-period SMA when evaluating an oversold stock to see if there is still an uptrend.

Also, you know I don’t enjoy shorting shares because, in the long run, it is not profitable.

Okay, let’s go to our next topic now to learn whether to buy an oversold stock.

What does oversold stock mean?

Oversold stock means that the stock is about to reverse its direction. However, the price at which it will change direction is still unknown. Because it is still unknown, a trading system should also include momentum.

Momentum is essential, considering that a stock is still falling even though it has signs of being oversold.

How to know if a stock is oversold?

To know if a stock is oversold is quite tricky, yet using some technical indicators may give early information. Technical indicators such as RSI, Bollinger band and MACD usually show early signs, which one can use to decide whether it is time to buy. The RSI indicator is best when the period is lower than five.

Is a stock being oversold good or bad?

Stock being oversold is usually good if it meets all the requirements of a reliable trading system. A sound trading system is typically the result of back-testing. The back-testing method should show the same performance in the sample and out-of-sample data to know if the oversold trading system is good or bad.

Should I buy oversold stock?

Where does the term oversold stocks originate? The name has started from the experience of several traders. (Source)

In the 1970s, J. Wells Wilder created the RSI indicator to find oversold stocks.

Most traders have used a moving average in a trending market in the past to predict price movements.

However, they will use RSI in a consolidated market to improve their win rate.

When you read the article above, you’ll notice that there are many oversold signals on the stock chart, yet the RSX continues to move downwards.

So, you can’t use the RSI indicator in stock trading alone to predict a good buy signal.

Well, professional traders use other methods in their trading system to confirm a high probability trade.

Should you buy oversold stocks?

You should buy oversold stocks only if there is also momentum in the reversal. Momentum is a vital information to confirm that there is a high probability that the short-term trend will reverse. It is short term because oversold stocks are usually only bought during pullbacks.

However, look for other signs of confluence to increase your chances of winning the trade.

I don’t like Jim Cramer with stock trading, but he shared some unusual signs that a stock will explode.

He said that volume could help you find pivots in the stock price to determine if the move is real. (Source)

Well, he is right when he said that.

For example, if you see an RSI below with increasing volume, avoid the stock because the downward move can continue fast.

Otherwise, an oversold stock with lower volume is a good stock because only a few traders are selling their positions.

However, backtest it yourself to see if it’s true.

I have been using only two indicators to determine if a stock has oversold.

Later, I will show you how I set it up and use it to share my techniques.

However, let’s talk about the risks first to help you avoid bigger losses.

Is it good to buy oversold stocks?

Buying oversold stocks is usually good if all the requirements of a sound trading system are present. The condition may be that the two-period cumulative RSI is below five, and the price is above 200MA.

Stock Oversold Indicator – Technical Analysis

You can tell if a stock has oversold by using a Relative Strength Indicator to find stocks to buy.

I have been teaching the 2-period RSI in stock trading to have good trading set-ups.

Well, I don’t enjoy using the default period (14) because it does not have an edge.

In this RSI oversold stocks, you can find ready to move up stocks to get trading signals.

If you want to know more, go to the homepage and click on the “Mean Reversion Trading Strategies.”

How to know if stock is oversold?

I have tested RSI 2 and 30 in different countries, and I found that these two settings work correctly to use it in my trading.

The first settings are using a shorter period for oversold signal, and it only needs two days of data to create a buying signal.

If you want to trade daily, you can use the 2-period RSI strategy, which you can find in the mean reversion strategies.

Searching the web can frustrate because most big websites teach the 14-period RSI.

The default setting does not give accurate signals because it is unreliable.

If you don’t like to read that post then you can watch the video below to learn more about it.

Professional traders named the indicator the cumulative RSI to stress that the market has oversold.

Okay, you can watch the video now to tell if a stock is good.

How to see if a stock is oversold?

To see if a stock has a sign of being oversold, one can use one of the best indicators. The indicator that most traders employ is the Relative Strength Index. For example, this video will help in seeing what stocks have recently oversold.

Buying oversold stocks strategy using a technical indicator. Combining two days of RSI values is an example of getting an extreme oversold condition.

Buy:

  • Cumulative RSI is below five (RSI previous day + RSI this day or EOD); We combined low RSI to get the maximum impact.
  • Price is above 200 MA or above support

Sell:

  • Cumulative RSI cross above 65 or lower(Depends upon the backtest)

This strategy is one of the best method to get an oversold reading. The oversold signal is also strong because the price is still above 200 MA.

When the price is above 200 MA, it usually means there is still an uptrend, although there is an oversold condition. It also cancels the strength of the negative momentum.

Also, in an oversold condition – price movement that is going down, there may be an opportunity for a reversal to the upside.

This opportunity is an example of a bullish divergence, although the stock is at the oversold territory.

A bullish divergence differs from the bearish divergence.

It is different because although the stock is moving down, there is still an uptrend.

How to identify oversold stocks?

To identify oversold stocks, one can use Amibroker, using and AFL, to scan stocks in the stock market. The AFL code is the trading strategy reduced to a written program. The trading strategy can be the two-period RSI shown in the video.

The strategy usually works well in a bull market, even in a bear market.

Did you learn anything?

When my mentor told me about that indicator, it surprised me how accurate the indicator was, so I added it to my stock trading.

If you use a broker that does not charge commissions, you’ll earn more money by using this strategy to increase your capital.

In the past, you can’t use this trading system because of high commissions, but now, you can earn every day if you use the shorter period RSI.

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How to check if a stock is oversold?

To check if a stock is oversold, there should be a strong bounce from support levels. Support levels can be dynamic or static support lines. Examples could be a moving average indicator or a more advanced ALMA. Static supports are the lines usually marked on a technical chart.

RSI Oversold Stocks Definition

RSI Oversold stocks are stocks that are filtered using the Relative Strength Index indicator. The indicator has been giving higher success rates for short-term traders when using two-period RSI. A lower period is better because long candles in the chart usually revert their mean.

Wrap Up

This post is already longer than expected about oversold stocks. However, you can still know how to tell if a stock is oversold when you return to the strategies above.

Should I buy an oversold stock? The answer to the question is always a yes as long as there is a bounce at the support and strong momentum.

Did you learn something about our post, what does oversold stock mean? Please share it.

Related Questions:

What happens if a stock is oversold? Oversold stocks rise fast if they found significant support. Significant support is usually intense buying pressures among trading participants. The fierce buying may be because of a catalyst coming into the market.

What to do when a stock is oversold?

When a stock is oversold, do not buy the stock immediately. Wait until there is a sign of bounce from a support level. Waiting and being patient can prevent lots of losses.