What is the sold out sales model?
The sold out model is a technique used to estimate when a period of declining prices for a security has ended. It is used by investors looking to benefit from a change in trend after a period of intense selling pressure.
- The sold out model is a technique used by traders to determine if a security has reached its minimum price.
- It is commonly used when a security has been subjected to an intense “panic” sell.
- The sold out model is based on price and technical information such as recent trading volume, support, and candlestick or chart patterns.
Understanding the exhausted sales model
The sold out sales model is suitable for periods after unusually heavy sales, also known as “panic selling.” In these situations, opposing investors can profit by “buying the dips” at unusually low prices.
Panic selling can be described as the quick sale of a security based on short-term events that are not clearly connected to the intrinsic value of that security. For example, a stock could face a panic sale in response to a negative rumor of an ongoing legal battle. Sometimes panic selling can lead to price drops much more severe than the news that triggered the panic warrants.
In these situations, the sold-out selling model can help disgruntled investors assess when the price drop is likely to reach its lowest point. To achieve this, it uses information about trading volume, moving average price history, and certain chart patterns to detect when a positive change is approaching. Because it is primarily based on information from the price chart, the sold-out selling model is generally used by traders who follow the technical analysis approach to trading.
The exhausted selling model is similar to techniques used by value investors, who seek trading opportunities by tracking companies with low price-to-book (P / E) ratios, low price-to-earnings (P / E) ratios, and low price-to-book (P / E) ratios. Similar. metrics. However, the sold out model differs from these techniques because it is based solely on the price history of the security and not on its fundamentals.
Although different investors may use modified versions of the sold out model, most versions involve the following guidelines:
- First, the value in question must have recently declined due to unusually high trading volume.
- Second, there must be recent evidence of buying pressure (after the dip), such as a bullish engulfing pattern or any type of bullish chart pattern within price or on a technical indicator.
- Third, the stock tests a support area, such an important moving average, or a price where the value bounced off previous declines, indicating a base of demand from buyers.
If all of these factors are in place, the exhausted selling model would predict that the stock has reached its lowest point in price and that a positive reversal will soon occur.
As stated, these are general guidelines, and individual traders can trade variations of this model using the technical tools of their choice.
Once a trader buys based on the alignment of the guidelines, a stop loss can be placed below the recent low to control risk.
Example of the sold out sales model
The following daily chart for ROKU Inc. (ROKU) shows a significant uptrend followed by a sharp drop in high volume prices.
A trader using a sold out approach would have noticed the high volume and strong sell-off. They would then have looked for evidence of buying pressure, potentially near some level of support.
In this case, the price falls to a support area based on a previous low. The price also fell below the 100-day moving average, which some traders consider important, and then rose again.
In terms of a bullish candlestick pattern or chart pattern, price formed a small cup-and-handle pattern near support. The price broke the pattern to the upside, indicating a bullish move. A few days before the cup and handle breakout, the Stochastic Oscillator made a bullish crossover into oversold territory.
A stop loss order can be placed below the cup and the handle (or below the swing low) once a trade has been entered. This helps control risk in case the price continues to decline.
Exhausted Sales Model Facing Catching A Falling Knife
The sold-out sell model is used to buy stocks that have fallen in price but also exhibit positive rebound technical characteristics. This is different from catching a falling knife, a colloquial term for buying stocks after a sharp drop in price. This can be more dangerous if the security has not shown signs of stabilization or build-up.
Traders use a wide variety of technical metrics to determine if an asset is oversold. A sharp price drop, by itself, is insufficient to determine when sales sell out and prices may continue to fall further.
Limitations of the sold out model
When the price is falling, it can keep falling even if the sold-out model guidelines are met. There may be a dead cat bounce, as traders try to buy the dip, before prices continue to decline. A large decline does not necessarily mean that a security is worth buying at the current price. In many cases, these drops occur for fundamental reasons and market conditions.
The model itself does not predict how much the price will bounce or for how long. It is up to the trader to determine when to exit profitable trades. Risk can potentially be limited with a stop loss, but in fast-moving market conditions, the stop loss may be subject to slippage, resulting in a greater loss than anticipated.