What Happens When Stock Markets Are Overbought?

Understanding the concept of overbought is essential to unlock the secret of stock market success. In this video, we'll explain what overbought means, why it's crucial to understand, and what kind of return you can expect when the market is overbought. We'll also introduce the principle of mean reversion, which is vital to navigate the market's complexities.

In statistical terms, mean reversion means that strong deviations from the trend will eventually revert to the mean and move in the opposite direction. Overbought is when the market has experienced a period of growth, which could be days, weeks, or months. We'll provide a clear definition and demonstrate how to identify overbought conditions using the Relative Strength Index (RSI) indicator.

To back up our argument, we'll present a backtested trading strategy based on the RSI indicator. We'll buy the S&P 500 when the 2-day RSI is above 95 and sell it after N days. Our backtest shows that the returns in the first five days after entry are significantly lower than the long-term average, which is about 0.05% per day. However, as time goes on, the returns gravitate toward the long-term averages – as expected.

So, if you want to make more informed investment decisions and achieve greater success in the market, it's crucial to understand what happens when the market is overbought. Watch this video to learn more! Don't forget to subscribe and like our video to support us in delivering more free videos in the future!

Chapters
0:00 Overbought Stocks
0:23 Mean Reversion
1:16 A Backtest to Explain Overbought
1:47 Results
2:10 Summary and Conclusion

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