The prices in the market are not always continuous moving up or down continuously. At a certain price level has been rising or falling too far away will experience a retracement or correction, before continuing the movement direction or trend reverses direction. Prices are rising and reached level of saturated conditions would have a specific purchase or overbought, and the price is down to a certain level will experience a State of saturation to sell or oversold.
Overbought or oversold conditions likely will happen is a correction, or a reversal of the direction of motion (reversal). Both possibilities can be confirmed with the indicator of the oscillator, the popular is indicators of Relative Strength Index (RSI). If unconfirmed explicitely overbought or oversold condition is a good trading opportunities.
Overbought versus Oversold
An overbought or saturated buy shows the period of time which occurred a significant uptrend movement and consistently without having the means of correction. On the chart this apparent State of trading when prices rose from the lowest level on the left bottom of the chart to the highest level on the right side of the chart as shown in the following example:
An oversold or saturated sell shows the period of time which occurred a significant downtrend movement and consistently without having the means of correction. In this state of trading chart looks when the price came down from the highest level to the left of the chart to the lowest level on the right bottom of the chart like the following:
Because prices will not continue to go up or down, on a certain level will turn direction. Level at which the price will most likely turn the direction is overbought levels or oversold. Often times the price moves sideways (ranging) on the levels within a rather long before it starts to turn direction. We will look at the level of the overbought and oversold levels with the help of the indicator RSI and when is the most appropriate trading opportunities.
See the trading opportunities with the RSI indicator
The popular indicators to identify overbought and oversold conditions is RSI, usually with a standard 14 period. Simple rules, when the RSI has reached level 70 it considered price was overbought and would most likely occur toward correction down (downtrend), while when prices reach 30 RSI level is considered to have been oversold and there will be a correction toward the top (uptrend).
Nevertheless we must rather wait to go as it is often an indicator of RSI has been overbought or oversold State but prices still go up or down with the firm. In order to be secure, we must wait while the RSI had cut the lines of level 70 from top to bottom for overbought case like the following example, or cutting lines of 30 levels from bottom to top for case oversold.
In the example above a sell entry made after the RSI level 70 cuts from top to bottom (area B), and to avoid entry overbought when things just happen to (area A).
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