Determining Overbought and Oversold Conditions Using Indicators

Determining (predetermined) overbought and oversold conditions using indicators can be a way to enter trades at an advantageous price. It also eliminates the guesswork most traders do, when it comes time to define entry/exit points for their most recent trade.

Overbought and oversold conditions usually occur (and last) only temporarily Elliott Wave Theory. This means that we need tools that will enable us to quickly determine these specific conditions in order to take advantage of them with fast-acting orders or without placing orders at all. We’ll look at some of those tools next.

Determining Overbought and Oversold Conditions Using Indicators

Before I go any further, I want to add what you’ve probably already suspected: the methods defined in this article are not 100% reliable. The few indicators I’ll present are not capable of producing sure bets. What they do, however, is increase the odds Double Bottom Pattern in your favor. Just by using them to enter trades or to exit existing ones you will be able to get better results than otherwise.

Determining Overbought and Oversold

So what are these overbought/oversold conditions I keep mentioning?

Well, it’s usually just a way of saying that buyers/sellers have pushed prices too high/low given the current market conditions and that this state of affairs won’t last for very long before balance is restored to price action.

Overbought and oversold conditions

There are two types of overbought/oversold conditions: temporary Swing Trading Strategies and lasting . A temporary overbought condition occurs when resistance levels are broken and the price rises to a new high which isn’t sustainable because sellers start arriving and push prices down temporarily. A lasting overbought condition is one when buyers keep buying after resistance levels are broken and this continues for some time (weeks/months) which again won’t last.

Overbought and oversold Indicator

These temporary or lasting conditions can be detected using various tools such as moving averages ,

Fibonacci retracement levels , Bollinger Bands ®, etc., but Trend Lines Indicator in this article we’ll focus on three specific momentum indicators: the Relative Strength Index (RSI), Stochastic , and MACD . All of these perform in similar fashion: they compare today’s closing price with previous ones and then show us by how much today’s closing price deviated. As a result, they give us a reading of how active buyers or sellers are at a given moment in time.

Overbought and oversold conditions works:

The greater the deviation from an equilibrium point (the norm), the more overbought/oversold conditions exist Strongest World Currencies and vice versa. In other words, if today’s closing price is higher than yesterday’s, then we can expect it to return back toward that level as buyers or sellers take profits and let prices “cool off”. However, the degree of deviation from equilibrium is another story. It depends on various factors such as volatility , volume , etc., and this is where these three indicators come into play: they show you how much overbought/oversold conditions exist with respect to prior periods of time.