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Looking to steer clear of overbought stocks? Check your screens

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Traders naturally want to buy stocks that are still undervalued while avoiding those that have already been the beneficiaries of recent buying. Doing this effectively entails knowing how to screen the market. To find equities that tend to make bigger moves than others -- that is, they are more volatile -- you can look at the beta of the stock. A stock with a positive beta generally follows the general market, in the sense that they both tend to rise or fall together. The higher the beta, the larger the swings relative to the broad market or benchmark. A negative beta means that the asset's returns and the market generally move in opposite directions. And a stock with a beta of zero tends to change price independently of changes in the overall market. For timing, traders tend to use mathematical models called oscillators to screen for overbought and oversold conditions. There are several to choose from, each with its own focuses. Some the most commonly used are the stochastic oscillator (STO) and the relative strength indicator (RSI). Everyone has a favorite and some work better on different types of stocks or in different situations. Options traders also need to cope with the probability of options expiring out of the money, which involves some complicated statistical math calculations. However, there are several free online calculators on the web, easily found by searching Google with the following phrase, "calculating probability options expiration." Some online brokers provide the calculation as part of their options chains. For example, both TD Ameritrade's Think or Swim and Trade Architect platforms and TradeMonster.com allow traders to open a free account (no funding requiring) and get access to the options tools. A nice perk from TD Ameritrade is that they allow traders to flush out their strategies with a $100,000 "paper money" or practice account.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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