Overbought and Oversold Indicator
The overbought oversold indicator is built on one of the oldest principles in trading and investing: buy low and sell high. The best way to do that is to find opportunities where price is trading below its intrinsic or fair value. For more, read about Daily Pivot Point Indicator.
- A widely used, free indicator
- Shows real-time market moves, overbought levels, and oversold levels
- The indicator can help you gauge when a market move may be running out of steam, which some traders use when planning entries and exits
- Works on all currency pairs and timeframes
- Compatibility: MetaTrader 4
How Traders Read the Indicator
- The indicator is simple to read: it shows the period during which a market move may be running out of steam or nearing its end. Traders use this to try to time entries and exits.
- Overbought describes a situation where price has moved up strongly without much pullback.
- Oversold, on the other hand, describes a period where price has moved down strongly without much pullback.
- The market is considered overbought when the indicator rises above the 70 level; a sell signal can be generated.
- The market is considered oversold when the indicator falls below the 30 level; a buy signal can be generated.
Based on our experience, price cannot move in one direction forever. Currency pairs that are overbought or oversold have a greater chance of reversing, but they can also stay in an overbought or oversold zone for a long time.
There Are Two Ways to Trade With the Indicator
1) Take a SELL signal when the indicator drops below the 70 level, or take a BUY signal when the indicator rises above the 30 level. The best approach here is to watch the full context of price action; if the market looks like it is reversing, that is the point traders typically look at.
2) Close buy positions once the indicator line turns red, and close sell positions once the indicator line turns green.
Traders use tools like this to try to spot reversals and identify moments that may precede a price correction, since many rely on indicators that help flag overbought and oversold markets.
The overbought oversold indicator is one of the technical trading tools available, along with some general pointers on spotting these conditions. It also helps to understand how overbought and oversold levels are typically used when planning trades.
Being able to recognize overbought and oversold zones is also considered a cornerstone of a disciplined trading approach. Identifying these levels can help traders aim for better entry and exit points, which is what this indicator is designed to show.
Asset prices cannot move in one direction indefinitely; at some point they turn and trade in the opposite direction. Being able to gauge the timing before that happens is a skill that many experienced traders work to develop.
While all this sounds straightforward, identifying overbought and oversold markets can be difficult at first, and some traders spend years refining their approach. The overbought oversold indicator is one tool that can support this process when used carefully alongside other analysis, and signals from it can still fail.
Disclaimer: This article is for educational purposes only and does not constitute investment advice. Technical indicators such as the overbought oversold indicator can fail, and past signals do not guarantee future results. Trading forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. Some links on this page are affiliate links; we may earn a commission if you use them, at no extra cost to you.
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