Finding Oversold Stocks To Invest In

Investors use many different methods when investing in shares, but a common approach, and one which will always be popular, is to seek out potential bargains by looking for stocks that have been oversold.

The best way of doing this is by using technical analysis, and in particular oversold indicators. These indicators are generally oscillating indicators and give a strong indication of when a stock is oversold. Classic examples of such indicators include RSI, Stochastics and CCI, which indicate oversold positions when the indicator is below the 30, 20 and -100 level respectively.

I personally use all three of these indicators to indicate whether or not a company's share price is oversold, and if all three are below the oversold level then it's a strong signal that the stock is oversold. However you shouldn't just buy shares in every single company that is oversold on all three of these indicators as that's financially suicidal. You still have to be selective.

Once you've got a list of oversold candidates, you should then look at the fundamentals of each company. Share prices are generally low and oversold for a reason and if that reason is because a particular company has lots of debts and is in financial trouble then it's share price may well fall a lot further, and they may even go bust so you wouldn't want to buy shares in this company.

The best oversold positions are where a share price has risen strongly in recent months and/or years and has simply become oversold due to investors taking profits or because the wider market has fallen. In these cases finding companies that are oversold on the RSI, Stochastics and CCI can be extremely profitable.

There are no guarantees of course but investing in good quality companies when they are temporarily oversold can be extremely profitable. By good quality companies I mean companies that are growing their revenue, profits and dividend payouts year on year, and are likely to continue doing so in the coming years. 

Of course even these quality companies can still be dragged down by the wider market, so it's still a good idea to use a stop loss because you can always sell and buy back later at a cheaper price. Just because a top company is oversold does not mean that it can't go even lower.