I've just noticed that many people are still confused about reading Overbought and Oversold in the market. Let's discuss what overbought means and why it’s important.

Simply put, overbought is when the price has been bought too much and becomes excessively high, while Oversold is the opposite—when the price has been sold off too much and becomes too low. These tools help us avoid buying at the peak or selling at the bottom.

Using RSI is quite straightforward. Most traders look at RSI crossing above 70 as a sign of overbought, indicating the price might reverse or pause its upward move. Conversely, RSI below 30 suggests oversold conditions, meaning selling has been excessive and a rebound might occur. But importantly, overbought is just an indicator, not an absolute buy or sell signal.

The Stochastic Oscillator uses the same concept but from a different perspective. It shows where the closing price is within the high-low range. If %K exceeds 80, it’s also overbought; below 20 indicates oversold.

What to watch out for is that overbought signals are just that—signals, not commands. I’ve seen many people sell immediately when they see overbought, only to get caught as the price continues upward. Therefore, it’s best to use it in conjunction with other signals, such as divergence or moving average crossovers.

The Mean Reversion strategy works well when the market is moving sideways within a range. Prices tend to revert to the mean. When overbought, look for selling points within that range. Divergence is used when a trend is about to change; overbought conditions serve as a warning that buying momentum is weakening. If RSI fails to make a new high while the price does, it could indicate a reversal downward.

In summary, overbought is a tool that helps us identify potential trouble spots in price action, but it should be used wisely. It’s not a direct buy or sell command. Try combining it with other tools, and you’ll see how much it can assist you.