Oreo – The stock market is quite erratic; at times of great volatility with safe margins, entrance and exit points often become impossible to estimate. While trading a stock as erratic as Tesla, predicting the result in a lucrative manner is never simple.
Above Tesla’s volatility, there is a price action pattern that has always shown to be ultimately a stock price driver. Although it is very rare at times, this has been so successful that, should it be discovered in the past, traders would adore their profits due of this trend.
We will learn below in the essay how this price formation occurs, what basic trading guidelines are lying under it, and how to profit from it. Supported by high proportion of successful trades and backtesting data, this approach offers a great chance to leverage Tesla’s stock’s price swings.
When Tesla’s stock price moves up every time such a condition is satisfied, it is the buy signal. The circumstance indicates that Tesla’s 14-day Relative Strength Index is below 25, so indicating that the stock has been “hammered,” or oversold.
This approach plays on short-term stock price rebounds brought on by continuous down pressure. RSI readings at or below this level have clearly foreshadowed a dramatic comeback over the next few days in Tesla’s past.
How does the plan work?
This approach is based on buying Tesla shares at a point following which it has produced an oversold signal. It achieves this by lowering the 14-day RSI to values below 25. Following such a signal confirming, the trader waits several days until the price returns.
Trading guidelines
- Buy Signal: Tesla’s 14-day RSI comes out to be less than 25.
- Hold for n days: Once a buy signal generates, hold the stock for some number of days; we will discuss suitable timeframes in the next subsection depending on back-testing data.
- Sell Signal: Sell the stock once it has been held for so many days.
Backtesting Results: How Rich This Pattern Is?
Back-testing this approach on Tesla’s stock price has turned be quite impressive. The following are the results:
Payback differs depending on whether one holds six trading days following the RSI at a level below 25 and then on.
After six trading days following the RSI has dropped into the oversold range below 25, your average gain per trade is at 8.74%.
- Now that the point for Tesla stock-two weeks following the RSI signal-into another week stands at a 100 percent success rate,
- Equity Curves: Starting with a $100,000 investment and holding Tesla for six days after each signal, it grew to $267,000 over time producing an annual return of 7.5% while being invested only 2.2% of the time.
This data reveals that for Tesla, even if market exposure intervals are somewhat short, it does record some rather notable price recoveries.
Why does Tesla’s 14-day RSI strategy work?
One such momentum oscillator tracking speed and change of market movements is the Relative Strength Index, or RSI. RSI below 25 indicates that Tesla stock is in oversold zone, thereby indicating that significant selling pressure has caused the stock to have been sold down.
This works so well as, from those overshooting periods, Tesla shares always rebound with a very high momentum. By reacting to these indications, traders reduce perhaps more significant market uncertainty and increase their chances of profiting from some really sharp recoveries that might follow.
Streamlining This Approach
Backtested data showed an ideal holding time of six trading days following an RSI, hence traders are advised to try different holding times that fit their risk tolerance and set trading objectives.
Here are few instances:
Three days: Faster, brief deals with less average gain still profitable.
- Ten days holding period: The deal will be subject to more market variations longer, although much longer holding period probably involves larger changes.
This approach is consistent in showing Tesla’s stock price is rising in every scenario in which this RSI pattern arises independent of the holding duration.
An illustration of live trade would be
Allow me to illustrate this approach with an example. Suppose on January 15th Tesla’s 14-day RSI drops below 25, indicating an oversold situation. Then you purchase Tesla shares here.
Six days go by, and today the RSI passes over 25 and the stock has gained almost 9%. You book a clear gain after selling the position.
This trend indicates how it can cause traders to capture bounces in the Tesla stock, so restricting additional possible loss.
How the Tesla Stock Trading Plan Works
- Highly Durable Win Rate: Price of Tesla’s stock rises every time such an RSI pattern shows a release; hence, in backtests over short holding periods, effectively a near-perfect win rate.
- Lower Time in Market: Reducing the total time Tesla spends in the regular volatility over time, the new rules guarantee that its time exposure in the market is but roughly 2.2 percent of its lifetime.
- Clear, Easy-to-Follow Rules: Explicit, Simple, Easily Followable Guidelines: There are no complicated restrictions; buy at an RSI reading below 25 and profit after the number of days is up. That is, no sidestripping into all those obscure indicators or pages and pages of market analysis thrust in your face.
Less commonly observed signals
The pattern is rare, thus a trader has to wait for just the correct setup calling for great patience.
Suggestion: Not the greatest for traders looking to invest for a longer period; best suited for quick bursts.
Since Tesla’s stock price has stayed more historical the more each time its 14-day RSI falls below 25, this lets a trader make short-term gains without needless market exposure. For someone expecting high winning rate catch Tesla’s ups and downs with great average returns and as few market exposures as possible, this would be perfect.
Should you be among the traders interested in more of these high-probability set-ups, some backtesting and varying hold period experimentation will help to fit the approach to your exact demands.
