I see many people still confused about Oversold and Overbought, so I want to share my experience. In my opinion, this is one of the tools that help us avoid falling into the trap of buying too expensive or selling too cheap.

Oversold means the asset has been sold excessively, causing the price to drop below what it should be. Overbought is the opposite, meaning too much buying has driven the price up. In both cases, the price tends to reverse, and if we can catch this timing, it’s a smart trading move.

The most commonly used tools are RSI and Stochastic Oscillator. I prefer RSI because it’s quite straightforward. If RSI exceeds 70, it indicates Overbought, meaning the price might decline. If RSI drops below 30, it indicates Oversold, with a tendency for the price to bounce back up. Stochastic works similarly but uses 80 for Overbought and 20 for Oversold.

The method I find effective is Mean Reversion during markets without a clear trend. At that time, prices tend to fluctuate sideways. I check the MA200 first; if the price is above this line, it indicates an uptrend. If below, it’s a downtrend. Then, I wait for RSI to enter the Oversold zone to buy or Overbought to sell. For example, in an uptrend, I buy when RSI is below 35 and close the position when the price returns to touch MA25.

But if the market has a strong trend, I use Divergence instead. This occurs when the indicator shows signals that conflict with the price, such as the price making new lows but RSI not following, which often means the downtrend is weakening. I wait for the price to break above MA25 and then buy, setting a Stop Loss at the previous low.

What to watch out for is that Oversold and Overbought do not mean the price will reverse immediately. Sometimes, the trend can continue for a long time. Therefore, I usually combine multiple tools, not just RSI alone. Adding Moving Averages or Support/Resistance levels can significantly improve effectiveness.

However, if you’re just starting to learn Technical Analysis, I recommend trying with Oversold and Overbought first. It’s a good foundation. Once you understand it, gradually add more tools. The key is to have your own trading system, not trade randomly.