Identify Overpriced Stocks

Identify Overpriced Stocks

By: www.CandleStickForums.com

http://www.candlestickforums.com/

A critical ability for both the day trader and those

engaged in long term investing is to be able to

accurately identify overpriced stocks. To identify overpriced stocks we need to decide by

just what criteria we are calling stocks overpriced.



For the stock investor a high price to earning

ratio implies that the market has driven a stock

price beyond the ability of the company to make enough money to justify that stock

price.



When, for example, interest rates are low so is the cost of doing business and getting

credit. Companies may borrow with the expectation that future profits will easily

pay off their debt.



During such times companies may develop a

substantial debt to asset ratio. This may seem trifling

when the economy is humming along.



However, if the economy cools off and cash flow reduces these sorts of

companies may be in trouble and their stock prices will

likely tumble.



One way to identify overpriced stocks is to

recognize a high debt load as a warning sign. Likewise in a booming market many new

investors will enter the market looking to make

profits.



As buying pressure increases so will stock prices. So long as there are new investors

coming on board the buying pressure will continue and so will the rise in stock prices.



To identify overpriced stocks in this market environment

one needs to anticipate what will happen when the last

new investor comes on board and traders start short

selling in anticipation of a stock market correction or full scale market reversal.



In day trading the ability to identify overpriced stocks is just as important is it is for the long term investor. It is just that the time scale is

shortened for traders.



In day trading the ability to identify overpriced stocks hinges more on technical analysis than fundamental

analysis.



The trader is more interested in anticipating price changes

that result from market volatility and uses technical

analysis tools such as Candlestick chart

formations to profitably anticipate stock price

variations.By: www.CandleStickForums.com


Although trading all stock price fluctuation can be profitable, the ability to

identify overpriced stocks can result in substantial profits.



This is because a truly overpriced stock may be

ready to drop substantially in price once it starts to correct.

By using Candlestick analysis a trader will often be able to accurately predict a

price turnaround on this kind of stock and profit by buying

puts just as the stock starts to fall.By: www.CandleStickForums.com


Continuing to follow Candlestick patterns as the stock falls, the trader will successfully anticipate when the stock will bottom out. He

will execute his options contract, sell stock at

the strike price, buy stock at the now low spot price and

pocket the profits.By: www.CandleStickForums.com


Then he will profit from buying at the bottom as the stock begins to rise again. When Candlestick signals tell

the trader that the stock is about to level off in price,

probably at the level it started at before its fall, he

will sell stock and pocket his profits again.



All of this sort of profit taking comes from the ability to

identify overpriced stocks, both in the long and the short

term.



Identify Overpriced Stocks

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