What is the term OVERBOUGHT VS OVERSOLD says ?

Just like any other professions, the security market involves a lot of jargon that is difficult to understand by someone who is new to this industry. So this article will contour what is the meaning of overbought or oversold, and what trading opportunities come to the light from these situations.

OVERBOUGHT VS OVERSOLD these two titles actually represent themselves very clearly. Overbought explicates a  time where there has been a prominent and relevant upward move in price without much pullback. Unlike overbought, the term oversold defines a period where there has been a prominent and relevant downward move in price without much pullback. Essentially, a move from the “upper-left to the lower-right”. Traders need to understand the price cannot move in one direction continuously, the price can turn around at some point. Exchange Rates that are overbought or oversold sometimes also have a big chance of reversing the direction, however, could remain overbought or oversold for a very long time.

The two most common indicators used to determine overbought or oversold conditions are relative strength index (RSI) and stochastics. Introduced by Sir J. Welles Wilder Jr. and in the year 1978 book New Concepts in Technical Trading Systems, RSI is an analyzing stock price change momentum. RSI is a restricted oscillator or indicator, which means that its value fluctuates between 0 and 100 depending on the performance of associated security, and is calculated based on prior periods’ average gains versus losses.

While the relative strength index (RSI) is calculated based on average profit and losses, stochastics collate the current price level to its range over a given period of time. Stocks show to close near their highs in an upward trend and near to lows in a downward trend. Therefore, the price action that moves further from these extremes to the middle of the range is explained as an exhaustion of trend momentum.