Yesterday, I thought about something that many people still don't understand in trading, which is the distinction between Overbought and Oversold. In fact, these are very important tools to prevent us from falling into traps.

Overbought is a condition where the price has been bought too much, making it overpriced. Conversely, Oversold is a condition where the price has been sold too much, making it undervalued. These two situations indicate that the buying or selling momentum is weakening, and the price may change direction.

Finding out whether overbought is not difficult; using RSI is enough. When RSI exceeds 70, it indicates that the price has been bought excessively. Meanwhile, RSI below 30 means the market has been sold excessively. Besides RSI, there is also the Stochastic Oscillator, which works similarly, using 80 as the overbought threshold and 20 as the oversold threshold.

What I observe from actual trading is that you shouldn't always buy when overbought because the price might continue to rise. However, if the price enters the oversold zone with RSI below 30, that is often a good buying point. I usually use a Mean Reversion Strategy, waiting for the price to drop to oversold and then buying, and closing the position when the price returns to the moving average.

Using Divergence is also interesting. For example, when the price makes a new high but RSI does not follow, it signals that the buying momentum is weakening. I have used this method when trading WTI, and it helped me avoid buying at high prices successfully.

In summary, overbought is a tool that should be used wisely, not a direct buy or sell signal. It should be combined with other indicators to increase confidence. I recommend testing it on a demo account before using real money.