overboughtoversold

Overbought and oversold are terms used in technical analysis to describe conditions where an asset's price has moved too far in one direction relative to recent price activity. They do not imply intrinsic value; rather, they suggest that a temporary pullback or reversal could occur, though not guaranteed.

Several tools measure these conditions. The Relative Strength Index (RSI) is the most common; values above 70 are typically described as overbought and values below 30 as oversold. Some traders use more extreme thresholds like 80/20. Other indicators include the Stochastic Oscillator and Williams %R, which operate on similar principles. Price reaching or closing near the upper or lower Bollinger band can also signal overbought or oversold conditions. In some approaches, extreme readings are combined with price action or volume clues.

Interpretation and usage: Overbought conditions may precede a slowdown in price or a correction, while oversold conditions may precede a bounce. However, in strong uptrends or downtrends, assets can remain overbought or oversold for extended periods. Therefore signals are often used in conjunction with trend analysis, momentum, and risk management. Divergence, where price makes new highs while an indicator fails to confirm, can strengthen potential reversals.

Limitations: Indicators are lagging and can generate false signals. They are sensitive to the look-back period and market regime. They should not be treated as deterministic predictors but as one input among many in a holistic analysis.