A stocks screener is an essential tool for traders looking to identify overbought stocks and potential market reversals. By applying specific technical indicators, a stocks screener can highlight stocks that have experienced rapid price increases and may be due for a pullback. Additionally, using a systematic investment calculator alongside a screener can help long-term investors balance their portfolios by systematically allocating funds into undervalued stocks instead of overbought ones.
In this article, we’ll explore how stock scanners can help traders spot overbought stocks and make better trading decisions.
What Are Overbought Stocks?
An overbought stock is one that has experienced a sharp increase in price over a short period, often driven by excessive buying interest. These stocks may be trading at unsustainable levels and could be at risk of a price correction. Overbought stocks are commonly identified using technical indicators like:
- Relative Strength Index (RSI): A stock with an RSI above 70 is typically considered overbought.
- Moving Averages: When a stock price is far above its moving averages (e.g., 50-day or 200-day), it may be overbought.
- Bollinger Bands: When the price consistently touches or exceeds the upper band, it indicates an overbought condition.
- MACD (Moving Average Convergence Divergence): A sharply rising MACD line may signal an overextended rally.
How a Stock Scanner Identifies Overbought Stocks
A stocks screener can automate the process of identifying overbought stocks by applying technical filters. Here’s how traders can use a stock scanner effectively:
1. Setting Up RSI Filters
- Configure the scanner to find stocks with an RSI above 70 to detect overbought conditions.
- Combine RSI with volume analysis to confirm excessive buying pressure.
2. Tracking Price Deviations from Moving Averages
- Use the scanner to find stocks trading far above their 50-day or 200-day moving averages to identify potential overbought levels.
- Look for stocks that have moved up significantly in a short period.
3. Analyzing Bollinger Bands
- Filter for stocks that have consistently touched or exceeded the upper Bollinger Band for a defined period.
- This helps traders identify stocks that are moving beyond normal volatility ranges.
4. Monitoring MACD Signals
- Scan for stocks where the MACD line is significantly above the signal line, indicating an overbought scenario.
- Look for divergences where price continues rising while MACD starts to flatten or decline.
Why Identifying Overbought Stocks Matters?
Spotting overbought stocks helps traders and investors in multiple ways:
- Avoid buying at inflated prices: Prevents entering trades when stocks are overextended.
- Prepare for potential reversals: Helps traders plan short-selling strategies or take profits.
- Improve portfolio management: Investors using a systematic investment calculator can identify better entry points for long-term investments.
Final Thoughts
A stocks screener makes it easier to identify overbought stocks by filtering through technical indicators like RSI, Bollinger Bands, and MACD. By combining these insights with a systematic investment calculator, investors can manage risk effectively and make informed decisions. Whether you’re a trader looking for short-term corrections or a long-term investor seeking better entry points, stock scanners provide a valuable edge in navigating the market.
