I just noticed that many people are still confused about the concept of oversold, which is a state where an asset has been sold excessively, causing the price to fall below its fair value, often indicating a good buying point. Meanwhile, overbought is the opposite, where the price has been bought too much, making it overpriced, and could be a good selling point.

What makes an asset oversold is that useful tools help us avoid buying assets that are too expensive and avoid selling at too low a price. This analysis uses various indicators to signal the current state of the price.

The two main popular indicators used to identify this state are RSI and the Stochastic Oscillator. Both measure values between 0 and 100. An RSI above 70 indicates an overbought condition, while an RSI below 30 indicates an oversold condition. The Stochastic Oscillator uses similar thresholds, with %K above 80 indicating overbought and below 20 indicating oversold.

But most importantly, oversold is just a warning signal, not an absolute buy or sell command. It should be used together with other tools to increase accuracy.

There are two main strategies traders use. The first is Mean Reversion, which is used when prices fluctuate within a range without a clear trend. Here, we buy when oversold and sell when overbought. To effectively use Mean Reversion, the MA200 moving average is used to identify the trend first. If the price is above MA200, it indicates an uptrend; if below, a downtrend. If the price moves around the MA line, it indicates no clear trend.

The second strategy is Divergence, used when looking for trend reversal points. Divergence occurs when the indicator and price show conflicting signals, such as the price making new lows but RSI not making new lows. This often signals that the trend is weakening and may reverse.

Using oversold as a tool helps improve trading performance, but it’s important to understand its limitations. It should not be used alone; confirmation from other indicators or price patterns is necessary to make our trading system more reliable.