May 10, 2014

How to identify overbought / oversold stocks using Amibroker

Many people get fascinated by overbought/ oversold stocks. This AFL will help you identify stocks which are oversold / overbought.

The basic indicator used here is RSI. Readings above 80 are considered overbought and readings below 20 as oversold.

For convenience, I have posted the code for both 5 days and 14 days.

And this is how the output looks like:

First result is sorted using 5 day RSI for oversold stocks.

Second result is sorted using 5 day RSI for overbought stocks.

My take: overbought means great strength and oversold means great weakness. But this is in context of the overall trend. So if the broader trend is bullish, one can consider a buy if stock becomes oversold. Similarly if the broader trend is bearish, one can consider a short if the stock becomes overbought.

The best indicator is price so when using secondary indicators like RSI etc, do some more study before taking a trade.

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