3 Ways To Tell If Stock Is Bottoming
Traders and investors well versed with the business know that it’s better to purchase assets (stocks, options and ETFs) after they decline rather than when they have risen. Buying assets when they are priced low may seem like a wise strategy because you think profits are just around the corner.
One thing you need to remember when buying low is to be cautious. If you buy a stock after it has experienced substantial decline and believe the present conditions will lead to its decline further, abort the trade.
Bottom in day trading refers to the lowest price reached by a commodity or index within a given period of time. The time frame can be a year, month or intraday. In order to determine the future price of a stock, option or index, analysts usually determine the bottom of a particular security.
The history of a stock’s price movement and trading volume is used to know future prices of securities. Analysts believe that price movements are trends and not random occurrences. Dozens of price patterns help to decide if a stock should be bought or sold.
Here are the technical aspects of a stock bottoming.
Look For Increased Volume
As an investor or trader, there are clues you can use to determine if a stock is nearing a point bottom. Majority of analysts’ reason that stock prices and relative volume are the two most important indicators. According to analysts, securities tend to bottom when few sellers are available for a particular stock. When few sellers exist, more buyers remain and if the buyers will be willing to pay a higher price, it means the price bottom will have formed.
What you need to know is that stock volume adds credibility to stock prices and price direction. This means that the higher the volume of stock bottom, the stock will not experience lower prices in the near future. For stocks to bottom, they have reached the inflection point.
The inflection point refers to an event that changes the progress of a company, economy or geopolitical situation. It is the turning point after a dramatic change where positive and negative results are expected. Inflection points are significant and its effects are well known and widespread.
It is also where the direction of a curve deflects as a result of an event. So, if fewer sellers exist selling at lower prices, people will be looking to sell high and if buyers remain, the prices of the securities will rise.
Look For Prices To Reclaim Moving Averages
Moving averages help to smooth out price data forming trend following indicators. They don’t predict price direction. They define current direction with a lag. Despite the phenomenon of lag, moving averages help to smooth out price and filter our noises. There are two popular types of moving averages.
a. Simple moving average
b .Exponential moving average
Simple moving average is usually formed when the computing average price of a stock is over a number of periods. Since simple moving average is based on closing prices, a 5 day simple moving average is calculated as the sum of five days divided by five.
Exponential moving average is formulated to reduce the lag. It achieves this by applying more weight on recent prices. Three steps are involved when it comes to calculating EMA. The calculation begins with the simple moving average which should be in the previous period as the EMA. The calculation proceeds with weighting multiplier finally concluding with EMA calculation.
As said earlier, identifying trends is a key factor of moving averages. It is used by most traders who want to make the trend their friend. When it comes to stock bottoming, traders have a higher chance of success by considering prices to sell high. One way of doing so is by using short term moving averages of 9 to 20 EMAs.
Confirm With Major Indicators
The Moving Average Convergence/Divergence oscillator or MACD was developed by Gerald Appel in the late seventies. It is one of the simplest and most effective momentum indicators. It helps turn two trend following indicators into a momentum oscillator. MACD achieves this by subtracting the longer moving average from the shorter moving average. This means MACD ends up providing the best of both worlds: trend following and momentum.
When it comes to stock bottoming, MACD and RSI are great indicators. MACD is known to fluctuate above and below the zero line. Relative Strength Index (RSI) is an indicator developed by Welles Wilder. It helps to compare the magnitude of recent gains and losses. Using both indicators, traders can turn from oversold conditions and start heading up.
Look For a Higher Low
In trading, there is no crystal ball to reveal to you when the prices are right to buy or sell. The only way to ensure that traders have made wise decisions is by implementing sound strategies. One of those strategies is putting in a higher low from previous low when it comes to stock bottoming. This will help to avoid buying into securities that are falling. Going against the grain is a strategy many traders feel works well when it comes to stock bottoming. As a trader or investor, it’s worth your time to read the signs and get to avoid losses.
Bottom line
Every investor wants to know when prices are about to make major changes in any direction that is top or bottom. By looking for major indicators like MACD and RSI or for increased stock volume, traders and investors alike can determine stock bottoming clearly. Furthermore, it will make you a more successful trader or investor.