Overbought forex indicator

Overbought/Oversold (OB/OS)

The OB/OS defines the momentum of the market by measuring a moving average of the distinction between the declining and advancing issues. To measure the Overbought/Oversold indicator you should subtract the number of declining issues from the amount of advancing issues and take a 10-period moving average of gotten value.

Is not defined until the 10th sample as it uses a moving average the value at the start of a data series. Points over 200 are bearish and readings under -200 are usually bullish. A sell signal is sent if the indicator moves under +200 and a purchase signal is sent if the OB/OS indicator moves over -200.

The OB/OS indicator is also helpful for defining the market's momentum. If more stocks are decreasing in price, a value below zero is generated. If more stocks are increasing in price (more advancing than declining), a value over zero is generated.

To handle broad market indicators in the most efficient way, use them for trading against broad market indices through futures, mutual funds, and options.

Overbought vs. Oversold and What This Means for Traders.

Overbought means an extended price move to the upside; oversold to the downside. When price reaches these extreme levels, a reversal is possible. The Relative Strength Index (RSI) can be used to confirm a reversal.

Like many professions, trading involves a lot of jargon that is difficult to follow by someone new to the industry. It’s our job as instructors to fill in as many knowledge gaps as possible to make the education process as simple as possible. Today, we will take a look at what it means for a currency pair to be overbought or oversold, and most importantly, what trading opportunities arise from these situations.

Overbought vs. Oversold.

These two terms actually describe themselves pretty well. Overbought describes a period of time where there has been a significant and consistent upward move in price over a period of time without much pullback. This is clearly defined by a chart showing price movement from the “lower-left to upper-right” like the chart shown below.

Learn Forex: USDJPY Hourly Chart – Overbought.

(Created using FXCM Marketscope 2.0 )

The term Oversold describes a period of time where there has been a significant and consistent downward move in price over a period of time without much pullback. Basically a move from the “upper-left to the lower-right.”

Learn Forex: USDCHF Hourly Chart – Oversold.

Because price cannot move in one direction forever, price will turn around at some point. Currency pairs that are overbought or oversold sometimes have a greater chance of reversing direction, but could remain overbought or oversold for a very long time. So we need to use an oscillator to help us determine when a reversal is actually occurring.

Reading the RSI.

There is a quick tool you can use to gauge overbought and oversold levels, the Relative Strength Index. The premise is simple, however. When RSI moves above 70, it is overbought and could lead to a downward move. When RSI moves below 30, it is oversold and could lead to an upward move.

Learn Forex: Relative Strength Index, Overbought and Oversold Levels.

But, we must be patient before we enter our trades, because sometimes the RSI can stay overbought or oversold for quite awhile. The worst thing we can do is try to pick a top or a bottom of a strong move that continues to move into further overbought or oversold territory. So we must wait until the RSI crosses back under 70 or crosses back above 30.

Learn Forex: Relative Strength Index, Overbought and Oversold Levels.

The image above shows the RSI clearly breaking above the 70 level resulting in an overbought reading, but we do not want to immediately sell because we do not know how far price could continue to rally. We want to wait until the RSI falls back below 70 and then place our sell trade. This gives us a better entry and a higher probability trade.

When the RSI falls below 30, same rules apply. We want to wait until the RSI crosses back above 30 before we place a buy trade.

---Written by Rob Pasche.

---Written by Walker England, Trading Instructor.

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What are the best indicators to identify overbought and oversold stocks?

Identifying stocks that are overbought or oversold can be an important part of establishing viable trade entries. Though there are a number of indicators that can be used to assess these conditions, some are more popular than others. Two of the most common indicators of overbought or oversold conditions are the relative strength index (RSI) and the stochastic indicators. Each measurement has its strengths and weaknesses but, like most indicators, they are strongest when used in tandem.

The RSI is a range-bound oscillator that is calculated based on prior sessions' average gains versus losses. As the number of sessions used in the calculation increases, the more accurate this measurement becomes. When the RSI of a given security approaches 100, it is an indicator that the average gains increasingly exceed the average losses over the established time frame. The higher the RSI, the stronger and more protracted the bullish trend. A long and aggressive downtrend results in an RSI that sinks progressively toward zero. RSI levels of 80 or above are considered overbought, as this indicates an especially long run of successively higher prices. An RSI level of 30 or below is considered oversold.

The stochastic indicators, like the RSI, are also range-bound oscillators. However, where the RSI is calculated based on average gains and losses, stochastics compare the current price level to its range over a given period of time. Stocks tend to close near their highs in an uptrend and near lows in a downtrend. Therefore, price action that moves further from these extremes toward the middle of the range is interpreted as an exhaustion of trend momentum. A stochastic value of 100 means that the current session closed at the highest price within the established time frame. A stochastic value of 80 or above is considered an indication of an overbought status, with values of 20 or lower indicating an oversold status.

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Overbought/oversold.

Traders are advised to trade in the direction of the major trend with a help of an indicator that will identify a trend and help you make profit out of it download it here 100% FREE.

Being risky while trading is not always the perfect solution. You could try waiting until there is a pullback in a larger primary trend and enjoy a lower risk opportunity.

Overbought situation in the market is when a specific currency pair has risen so much that it became overvalued, so the chances of it being pullback is extremely high. The oversold situation is exactly opposite, when the currency is highly undervalued. In other words, prices are at such extreme levels that a corrective move will have to take place.

A huge imbalance in orders takes place in the same direction increasing momentum and those with the winning positions will go ahead with taking their profits. This moment is a great opportunity to enter and go against the momentum because of the extremes that take place in the currencies. If the market is overbought, the trader will sell, and if the market is oversold, then the trader will buy.

There are few indicators that help traders identify when the market is overbought or oversold. One of them is RSI (Relative Strength Index). It compares gains and losses over a period of time (hour, week etc) and identifies the condition market is in at the moment. It has a scale from 0 to 100. Oversold being values under 30 and overbought – over 70.

Many indicators should become a part of a trader’s collection to make trading experience as successful and safe as possible. One of the most reliable and profitable indicators that could become your favorite can be downloaded 100% FREE here. It will make your trading risk-free and will help make your trading highly profitable.