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How to Trade Oversold Stocks
What are oversold stocks?
Oversold stocks by definition are the stocks that have been beaten down in the past years, months or days depending on what time frame you trade.
They are now trading at a level that is very low compare to their recent high and therefore allows traders to pick up shares at a discount.
Oversold stocks can be really profitable when you jump in at the right time and the ones who bought it during the break out usually get paid off nicely. However, you must be really careful because stocks can never be too cheap. When you think a stock is at the lowest price, it often go even lower. Therefore, you must have stop loss when you buy oversold stocks to protect yourself. As soon as the stock go lower than your price, you can cut your loss quickly.
How to trade oversold stocks?
There are different ways that traders use to trade oversold stocks. Many traders just buy stocks when the oversold indicator hits oversold, but I prefer to wait for signals that the stock is recovering from the oversold area. You can use RSI or Stochastic to predict oversold stocks. When RSI drop below 30 or when the Stochastic indicator drop below 20, the stock is consider oversold.
Let's look at a oversold stock chart. The stock FR were oversold base on the stochastic indicator around May 21 and again near the end of July. The stock then go up nicely after the stochastic indicator crossover 20 which indicates a break out signal for me. The stop loss is set at the previous low, so if the stock trend go against me and drop lower than the previous low, that's the time when I would sell my stock and cut my losses.
Let's look at another example, GOOG.
The stock made a stochastic crossover the 20 level around June 18 which indicated a possible break out. However, the stock failed to break above $585 the first week, but then the stochastic made another crossover the 50 level around June 27, and a Price and Stochastic Divergence occur at the same time. This indicated extreme strength and you should go long during that time. The stock then went from $570 to $642 in a few weeks. The stop loss should be set around $555 which is a little below the support level in case the stock go against you.
Oversold Stock Screener
How to search for oversold stocks
You can use our Oversold Stock Screener to use search for these type of oversold stocks using the RSI, Stochastic or other indicators that you like. All you have to do is search for the stochastic crossover and set your stochastic value to 15 and 25. Then hit the submit button, and you will get a list of break out stocks from oversold area.
Go to oversold stocks to see a list of oversold stocks.
Test the Signals