Definition of OverBought and OverSold.
These two terms are indeed familiar in the world of forex trading. In a currency trade, simply put, traders will always pay attention to the Overbought or OverSold areas. Why is it necessary to pay attention? usually in that area there will be a movement that is predicted to be able to provide profit or profit. In the world of stocks, usually if the price is too high there will be a decline that will be noticed, you could say this needs to be watched out for. In the world of forex trading, we can use both, either OverBought or OverSold. From there, you can make a sell or buy option later.
So what exactly is the meaning of OverBought and OverSold
?
In general, if we interpret it in Indonesian in our everyday language, OverBought and OverSold consist of 2 words each, namely the word Over itself shows the meaning of too or very, then Bought means Buy and Sold means Sell. If in our daily trading language Over can be said with “Saturated Level”. For a more detailed understanding as follows:
* Overbought (OB) is a condition or situation where the condition of the price movement has shown a buying saturation level. The point is that the price increases that occur in the forex market can be said to be too expensive in the market, so logically there will be no or a lot of interest in buying again so this condition allows for downward price movements. We know the law of the market “the higher the price of goods, the less often these goods are purchased, market behavior will usually make sales”.
* OverSold (OS) is a situation where the movement shown by the price gives an indication of selling saturation. The point is that the price reduction that occurs in the market is too cheap. Because the price given is too cheap, the conditions here will show a reversal which will bring buyers to raise the price to go up again. If we follow the law of the market “the lower the price of goods, it is impossible for continuous sales to be carried out, so that more and more people will make purchases”.
Even though both of them provide a saturated level of price movement, it is not impossible that these conditions show wrong indications, so in this condition that occurs in the forex market, we can find out the level of the Overbought or OverSold area using a boundary, which can be static and dynamic. We can use previously formed Support and Resistance to see saturated price levels, or we can use default or custom indicators that provide information on saturation levels of price movements. However, no one will know for sure whether support or resistance at what level is considered strong as a pattern for a reversal, or which area of the indicator level can be a sure reference for a price reversal to occur as well.
You can say it’s as simple as this, the saturation level condition given is only an indication so it’s not certain that it will actually happen (only a prediction), this kind of thing is usually called a false signal condition, most traders say or say, because like this, price movements in the forex market are very liquid and many market participants are brought together as one, so it is possible that these price levels form an area that is difficult to analyze because the conditions of the many market participants themselves differ in trading needs. That’s why many professional traders say that even if they show the best indications, they still apply financial management because any condition can occur in the market.
Take advantage of the OverBought and OverSold areas in forex trading.
Not only on the stock market, this activity can be carried out on the forex market to make a profit, which if forex trading actually gives you a double return, we want to carry out sales or free purchases, both of which can be done, unlike stocks, which are purchased first and then estimate. OverBought level then make a sale. The following below is a trading method that can be used to get profits from the Overbought and OverSold areas.
What is the background and what is the relationship between overbought and oversold with forex trading?
The terms overbought and oversold are used as a reference for traders to determine whether the price is too high or too low. If we look at the history of prices, the fact is that prices will always find a balance. The higher the price of a currency, the less demand for that currency and according to the basic law of economics, if the demand is less than the supply, the price will definitely fall. Likewise, on the contrary, if the price of a currency is lower, the demand for that currency will be higher and what will happen next is an increase in the price of that currency. It’s just a matter of waiting for the time.
This is the basic idea of overbought and oversold conditions, where the hope of traders is to sell when the price is at the highest peak and buy when the price is in the deepest valley.
How to take advantage of overbought and oversold conditions in forex trading?
By taking advantage of overbought or oversold conditions, traders hope to have a greater opportunity to gain profits because overbought and oversold conditions usually tend to have a high risk reward ratio, especially because the target for taking profits is generally long.
There are several indicators that have proven to be accurate in giving overbought and oversold signals. An example is the RSI (Relative Strength Index) which has a default setting of period 14, where when the chart on the RSI is at the level of 70 and above, the price condition is declared as overbought, while if the chart is at the level of 30 and below, the price condition is declared as oversold.
Also keep in mind that overbought and oversold conditions can vary depending on the fundamental factors underlying the price movement itself. If the fundamental factors are too strong, such as changes in the benchmark interest rate from the central bank, then overbought or oversold conditions can be very extreme and last a long time. We are also advised to prepare for technical analysis in order to determine where to place a stop loss. Lastly and most importantly, always be disciplined in money management and risk management because basically we cannot read price movements in the forex market for sure.
