3 ways to tell if your stock is bottoming

One of the most difficult and daunting tasks for any trader or investor is trying to determine when a particular stock has bottomed or reached a point where it no longer falls significantly. Everyone wants to buy low and sell high, but if you consider that the price of a stock will be affected by macroeconomic, political and economic events, then it is definitely a difficult task to show that a stock has bottomed out.

In addition, your stock is only one of thousands of stocks traded daily on the global market. Knowing when the stock bottoms can release huge profits and prevent huge losses.So how can we know with confidence Which stock has reached a low point? No one can consistently call a stock bottom with absolute certainty, but there are some common fundamentals and technical trends in stocks that are about to bottom.

Key points

  • Although it is impossible to determine when stocks bottomed, there are many signs that savvy investors can remember.
  • Paying close attention to the industry of your target stock and paying attention to how it performs relative to the broader market can help you identify the bottom.
  • Price and trading volume are important indicators that stocks are at a key turning point, especially when trading volume starts to pick up steadily.
  • Consider the opposite of what the general public thinks: if everyone is interested in a certain stock, then it may be time to sell.

Industry characteristics

The stocks you own in your portfolio belong to the industry. Industries are just listed companies and stock groups in related industries. Oil and gas, technology, finance, and retail are some of the industries that investors may be familiar with.

Generally, stocks are synchronized with the overall stock market and their respective industries. Determining which sector your stock belongs to is a good start to determine whether your stock is close to the bottom or the point of a smaller decline.

Most of us are familiar with the credit market crash in 2008, which severely hit financial stocks and even led to the collapse of financial icons. Most financial stocks fell together over a long period of time. As the entire financial sector experienced a historical decline, investors who wanted to find “value” in certain financial stocks were overwhelmed. The lesson learned is to identify and understand which sector your stock belongs to and compare its performance to the overall market.

Price and quantity

Once you have determined which sector your stock is in, there are other clues that can make you believe that your stock is close to the bottom. Many technicians believe that stock prices and trading volume are the two most important indicators of stock trends. When there are few sellers of that particular stock, the stock tends to bottom out.

It sounds ridiculously simple, but think about it: if there are few sellers, there will be more buyers, and buyers are more willing to pay higher prices for stocks. This means that the bottom of the price has been formed.

To a certain extent, trading volume increases the credibility of stock prices and price directions. Remember, stocks are traded based on supply and demand, just like all other commodities in the free market.​​​ There is much more than a gallon of milk that affects stock prices. Once the stock completes its decline, the greater the relative trading volume, the greater the possibility that the stock will not see a lower price in the short term.

Therefore, if the average daily trading volume of the stock XYZ is 5 million shares, down 50%, but the average daily trading volume of the last three trading days exceeds 15 million shares, and the stock price rises, the stock is likely to have reached an inflection point and has already been substantially Fell. Remember, since most people want to “sell at a high price,” there are fewer sellers at a lower price. If only buyers stay, the stock price will rise.

There are some technical trading programs that will show you the ideal time to buy or sell a particular stock based on the trading pattern, but they cannot clearly show whether the bottom has been reached.

Keep your ears in the street

The public’s view of when stocks bottomed may have been overlooked. Unfortunately, many ordinary investors hear the narration of business news and use it as a gospel.

Ironically, the main strategy of an entire investment school is to oppose General common sense. These investors are appropriately called contrarian investors. Contrarian investors tend to bet on what the “smart” money is doing. In many cases, going against the trend can bring high profits and also help determine whether your stock has bottomed.

In response to the Great Recession that began in 2007, the oil and gas industry experienced a major bear market. Oil prices have fallen by more than 50%, and oil and gas group stocks are losing a lot. Business news trumpets the downward trend, while pundits are talking about the demise of oil and the use of natural gas alternatives and solar energy. No one wants to touch oil stocks. Investors who bucked the market and snapped up blue-chip oil stocks made good profits. It pays to check every aspect of the stock story.

Many people think that going against the trend is very effective, especially at the top and bottom of the market. As an investor, it is at least worth your time to listen to what everyone is saying and wonder: Are they all right?

Bottom line

Ideally, investors want to know when the price trend will change significantly in either direction, whether it is reaching the top or the bottom. The bottom line is that no one really knows with certainty.

Clues, such as price changes leading to a sharp increase in trading volume and attention to the sector where your stock is located, will give you insight into whether your stock has reached the point where it no longer falls sharply.

Remember, these are only part of the investment puzzle, but if you can add these skills to your investment knowledge, you may become a more successful investor.

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