Right now, I want to share a frequently overlooked topic: the Overbought Oversold indicator. It’s a tool that helps us avoid falling into the trap of buying at prices that are too high or selling at prices that are too low.

Actually, Overbought Oversold is a technical analysis tool that uses various indicators to measure whether the current price is more expensive or cheaper than it should be, based on past price and trading volume.

Let’s break it into two sides. The first is Oversold, or excessive selling. It’s a signal that an asset has been sold off so much that the price is lower than it should be. Now, selling pressure weakens, buying interest comes in instead, so the price has a chance to bounce back up. The second side is Overbought, or excessive buying. On the contrary, when the price is bought so much that it becomes overpriced, buying strength weakens and selling pressure increases, so the price is likely to adjust downward.

The most commonly used indicators are RSI and the Stochastic Oscillator. Let me talk about RSI first. It’s calculated from the ratio of up days to down days, using the formula RSI = 100 - (100 / (1 + RS)). The RSI value you get will be in the range of 0 to 100. When RSI is above 70, it indicates Overbought. When RSI is below 30, it indicates Oversold.

As for the Stochastic Oscillator, it looks at where the closing price sits within the high-low range. It uses the formula %K = [(Closing Price - Lowest Price over 14 days) / (Highest Price over 14 days - Lowest Price over 14 days)] x 100, and %D = the 3-day average of %K. When %K is above 80, it’s Overbought; below 20, it’s Oversold.

But here’s the important part: Overbought Oversold is not an immediate buy or sell signal. You need to use it together with other tools. I like to use two strategies.

The first is Mean Reversal. Use it when the price is moving within a range. First, check the trend with MA200. If the price is above this line, it’s an uptrend; if it’s below, it’s a downtrend. Next, find the Overbought Oversold points of RSI, and then buy at Oversold or sell at Overbought. Close the position when the price adjusts back toward the SMA5. For example, when trading USDJPY on a 2-hour timeframe: if the price is above MA200, set RSI Overbought at 75 and Oversold at 35, then buy at Oversold and close at MA25.

The second is Divergence. Use it when a trend is about to reverse. Look for patterns like Double Tops, Double Bottoms, or Head and Shoulder, and also observe whether RSI signals conflict with the price. For example, if the price makes a lower low but RSI makes a higher low, that’s RSI Bullish Divergence. Buy when the price breaks above MA25. For example, when trading WTI on a 2-hour timeframe: observe that the price makes a Lower Low, but RSI makes a Higher Low, set the Stop Loss at the previous low, and close when the trend weakens.

However, every tool has its strengths and cautions. Overbought Oversold is a good indicator, but it must always be used together with other indicators. Don’t trust it alone. That’s the key to the trading approach I use. I hope it helps you trade more accurately.