I just noticed that people ask about Overbought and Oversold very often. Actually, understanding these is essential if you want to trade better—avoiding buying too high or selling too low.

Overbought/Oversold are technical analysis indicators used to determine whether the price has been bought or sold excessively. They analyze past price and trading volume data to indicate whether the current price is likely to be overbought or oversold.

Simply put, an Oversold condition occurs when an asset has been sold so much that the price is too low. You can see that selling pressure is weakening, and the price has a chance to rebound. Conversely, Overbought is the opposite: the price has been bought excessively, making it too expensive. Buying pressure may start to weaken, and the price could decline.

Oversold conditions can be identified using oscillator indicators such as Stochastic, which reads below 20, or RSI below 30. When in this zone, it’s not advisable to sell because the asset might be sold too cheaply. Instead, look for buying opportunities.

For Overbought, use Stochastic above 80 or RSI above 70. When in this zone, it’s not advisable to buy because the asset might be overpaid. Instead, look for selling opportunities.

The most popular indicators used to identify overbought/oversold conditions are mainly two: RSI and Stochastic.

RSI (Relative Strength Index) indicates the ratio of upward to downward price movements. RSI values range from 0 to 100. An RSI above 70 suggests overbought conditions, while below 30 indicates oversold. These thresholds can be adjusted based on the asset’s behavior.

Stochastic Oscillator shows where the closing price is within the high-low range. Values range from 0 to 100. When %K is above 80, it indicates overbought; below 20, it indicates oversold.

In actual trading, there are two main strategies:

The first is Mean Reversion, used when the price lacks a strong trend and oscillates within a range. Check the trend with MA200, identify overbought/oversold points, and act accordingly. Close the position when the price re-enters the average.

The second is Divergence, used when the price is changing trend. For example, if the price is rising but RSI is not following (Bullish Divergence), or the price is falling but RSI isn’t following, this signals a potential trend reversal.

In practice, overbought/oversold are helpful tools but should not be used alone. Confirm with other indicators. Each indicator has strengths and limitations. When used correctly and combined with other tools, they can improve trading accuracy.