I just remembered someone asked me about Oversold and Overbought, what they are and how to use them in trading, so I’d like to share my understanding of this topic.

Simply put, Oversold and Overbought are technical signals indicating that the price is too cheap (oversold) or too expensive (overbought), based on indicators that measure past price movements and trading volume. When the price enters oversold, it tends to rebound upward, and when it’s overbought, it tends to correct downward.

For identifying oversold and overbought conditions, the most popular indicators used are RSI and the Stochastic Oscillator. RSI measures the ratio between upward and downward price movements. If RSI is above 70, it indicates overbought; if below 30, it indicates oversold.

The Stochastic Oscillator considers where the closing price is within the high-low range. If %K is above 80, it’s overbought; if below 20, it’s oversold.

But the key is to use these indicators correctly. I often employ a Mean Reversion strategy when the market lacks a strong trend, buying at oversold points and selling at overbought points, aligned with the MA200 average. If the price is above MA200, it’s an uptrend; below it, a downtrend.

Another method I frequently use is Divergence, which looks for conflicting signals between the price and the indicator. For example, if the price makes a new low but RSI doesn’t, it’s a sign that the oversold condition is weakening and a reversal may be imminent.

In summary, Oversold and Overbought are useful tools to avoid buying too high or selling too low, but they should not be used alone. Combining them with other tools can improve trading accuracy.