Trading Mistakes: overbought stocks
IG's senior market analyst Axel Rudolph discusses with IGTV's Angeline Ong how to help spot overbought stocks and what to consider when in this territory.
(Video summary)
The common mistakes new investors make when interpreting trading charts
In this video, Angeline Ong explains some common mistakes that new investors make when interpreting trading charts. She is joined by senior market analyst Axel Rudolf, who provides examples to help understand these misconceptions.
One such example is Tesla's daily chart, where Axel shows the Relative Strength Index (RSI), represented by a line in orange at the bottom. The RSI reflects the behavior of the market or asset it represents. It increases when the market goes up and decreases when it goes down. When the RSI falls below 30%, it is considered oversold.
In the Tesla chart, the share price dropped to around $150 in April, indicating an oversold condition. However, the share price then experienced a rally and increased. This shows us that buying when an asset is oversold can lead to profitable outcomes.
On the right side of the chart, we can see that the RSI is above 70%, suggesting an overbought condition. Despite this, the Tesla share price continues to rise. If someone had sold their shares when the asset started becoming overbought at around $200, they would have missed out on the subsequent increase to nearly $280. This provides a clear example that solely relying on overbought or oversold indicators can result in missed opportunities or even financial losses.
The importance of comprehensive analysis in trading decisions
Axel concludes by emphasising the importance of considering other factors alongside indicators. Traders should not automatically sell an asset just because it's overbought or buy solely because it's oversold. This highlights the need for a comprehensive analysis and evaluating multiple indicators before making any trading decisions. Remember, trading is not just about one indicator but a combination of several factors that need to be considered.
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