Yesterday, I looked back at a friend's trading case study and thought this topic should be shared with everyone because many people still don't fully understand it. That is the concept of Overbought and Oversold in technical analysis.

Actually, Overbought and Oversold are analyses that help us avoid falling into traps of buying at too high a price or selling at too low a price. Indicators are used to measure whether the market is in an overbought (Overbought) or oversold (Oversold) condition based on past price and trading volume.

Let's start with the oversold (Oversold) situation. This is a signal indicating that an asset is being sold off to a price lower than it should be. When entering this zone, selling pressure often begins to weaken, and buying pressure comes in to replace it, giving the price a chance to rebound. Conversely, Overbought is the opposite situation, where the price has been bought so much that it becomes overvalued. When entering this zone, buying momentum starts to fade, selling pressure takes over, and the price tends to move downward.

There are several tools used to detect these conditions, but the most popular are RSI and the Stochastic Oscillator. RSI is an indicator that shows the ratio of upward to downward momentum. The RSI value ranges from 0 to 100. When RSI exceeds 70, it indicates the market is in an overbought zone. When RSI drops below 30, it indicates an oversold condition.

The Stochastic Oscillator works similarly. It shows where the closing price is within the high-low range over a specified period. When %K exceeds 80, it enters the overbought zone; when %K drops below 20, it indicates oversold.

However, this is where many people make mistakes. Overbought and Oversold are not immediate buy or sell signals. They are merely indicators that the market is overextended in one direction. They should be used in conjunction with other tools to be effective.

There are two main ways to use Overbought and Oversold in trading: Mean Reversion and Divergence. Mean Reversion involves trading within a sideways (sideways) market, where we buy at oversold levels and sell at overbought levels, expecting the price to revert to the mean. This method works well when the market lacks a strong trend.

Divergence, on the other hand, involves trading at trend reversal points. When an indicator signals a contradiction with the price—for example, the price makes a new low but RSI does not follow—this indicates weakening momentum and a potential reversal upward.

It's important to note that Overbought and Oversold are helpful tools but should be used together with other indicators for accuracy. Never rely solely on them. Whenever trading based on these signals, always seek confirmation from other indicators or price patterns. This way, our trading system becomes more robust and reliable.