Rigetti Computing, Inc. (NASDAQ:RGTI) shares continue to move higher on Friday. The stock has made a huge move up over the past week. It is the Stock of the Day.
The shares are extremely overbought and a reversal may be imminent.
Find out more about RGTI stock here.
Many trading strategies and methods are based on the concept of reversion to the mean. If a security gets overextended, it will draw traders into the market because they will be anticipating a reversal or reversion back to the norm.
Most of the time, a stock trades or stays within its average or typical trading range. If buyers become emotional and aggressive, they can push the stock above this range. When this happens, traders say the stock is overbought.
This will bring sellers into the market because they will be expecting a reversal or move lower. Their selling could put downward pressure on the shares.
There are many indicators that can be used to determine if a stock is overbought.
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The red line on the price chart is called a Bollinger Band. It is two standard deviations above the 20-day moving average. According to statistics and probability theory, 95% of trading should be within two standard deviations of the mean.
Rigetti has exceeded this threshold to the upside. This indicates overbought conditions.
There are two other popular indicators that traders use to determine overbought conditions on the bottom part of the chart.
The first is the Relative Strength Momentum Indicator (RSI). If the blue line is above the red horizontal line, it indicates overbought conditions. As you can see, that's the case now.
Beneath the RSI is the Stochastics Indicators. When the blue and green lines are above the horizontal red line, it indicates overbought conditions as it currently does.
Many newer traders think the more indicators they look at, the better off they'll be. They believe more is better. But these indicators, in addition to dozens of others, are just different ways of measuring the same thing.
More experienced traders tend to just use two or three different indicators. By only having a few, the trader can gain a greater understanding of the indicators and their nuances. This will allow for more accurate signals and insights.
Some traders are very successful because they keep things simple.
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