Accurate Buy and Sell Points: How to Identify Oversold and Overbought Conditions Every Trader Must Know

DeFi_Dad_Jokes · 2026-01-05T18:03:37+00:00

In the trading industry, many people know about Oversold Overbought, but not everyone knows how to use it effectively. This indicator helps you avoid falling into the trap of selling too cheaply or buying too expensively. In this article, we will look at how Oversold Overbought works, which indicators can help identify it well, and how we can apply it to Forex trading.

DeFi_Dad_Jokes

2026-01-05 18:03:37

In trading circles, many people are familiar with Oversold Overbought, but not everyone knows how to use it effectively. This indicator helps prevent you from being a naive trader who sells too cheaply or buys too expensively. In this article, we will explore how Oversold Overbought works, which indicators can help identify it accurately, and how you can apply it to Forex trading.

The True Meaning: Oversold Overbought “Misjudges” Price

Oversold Overbought is not a measure of the fair price based on fundamental factors (Fair Price) but is a technical analysis (Technical Analysis) method that uses indicators to assess whether the price has moved too far up or down.

This type of analysis relies on historical price data and trading volume to determine whether the current price is likely to reverse soon.

Oversold (Oversold): When Sellers Are Excessive

When an asset is sold excessively, causing the price to fall below its proper level, we call it Oversold. In such situations, selling pressure begins to weaken, and buyers often step in strongly, causing the price to tend to rebound.

Indicators that can identify Oversold include:

Stochastic Oscillator below 20
RSI below 30

If you see these signals, forget about selling because it might be a false signal. Instead, look for buying opportunities.

Overbought (Overbought): When Buyers Are Overenthusiastic

Conversely, Overbought occurs when the price has been driven too high beyond its reasonable level. At this point, buying momentum weakens, and selling pressure starts to take over, making a price correction more likely.

Indicators for Overbought include:

Stochastic Oscillator above 80
RSI above 70

When encountering this situation, avoid buying further, as the price is likely to pull back. Consider selling instead.

Measurement Tools: RSI vs Stochastic Oscillator

RSI (Relative Strength Index): A simple and popular indicator

RSI measures the strength of upward movements relative to downward movements, calculated as:

RSI = 100 - (100 / 1 + RS)

where RS = average gain over N days / average loss over N days.

RSI ranges from 0 to 100, with trading signals based on:

RSI > 70: Overbought (Do not buy)
RSI < 30: Oversold (Do not sell)

In practice, these thresholds can be adjusted depending on the asset’s volatility. Sometimes, RSI > 90 and < 10 are used for higher precision.

Stochastic Oscillator: A more detailed indicator

Stochastic indicates where today’s closing price is within the high-low range over a specified period, using the formula:

%K = [(Closing Price - Lowest Low over 14 days) / (Highest High over 14 days - Lowest Low over 14 days)] x 100

%D = 3-day moving average of %K

Usage thresholds:

%K > 80: Overbought
%K < 20: Oversold

Strategy 1: Mean Reversion for Range-Bound Markets

Mean Reversion assumes that high and low prices are temporary and tend to revert to the mean. It works well in markets without a strong trend.

Steps for Mean Reversion using RSI:

Use MA200 to identify trend: price above MA200 = uptrend, below = downtrend, close to MA200 = no clear trend
Find overbought/oversold zones, e.g., RSI > 90 or RSI < 10 as entry points
Enter trades when price touches these zones
Close positions when price re-enters SMA5

Real example: USDJPY (2H)

Observe that the price breaks above MA200 and starts oscillating within a range, testing the MA200 multiple times → indicates a strong uptrend
In this uptrend, RSI typically does not become oversold; set RSI Overbought at 75 and Oversold at 35
Focus on buying at oversold points, avoid shorting 4( Close or exit when the price re-enters the MA25

Note: Mean Reversion works only when the market is range-bound, not throughout the entire day.

Strategy 2: Divergence for Trend Reversal

Divergence is a conflicting signal: the price makes new lows but RSI does not follow downward, or the price makes new highs but RSI does not follow upward. This indicates a potential end to the current trend.

Divergence steps:

Identify assets with clear upward or downward trends that start showing reversal signals )Double Tops, Double Bottoms) 2( Check if RSI overbought/oversold contradicts the price trend
Enter when the price crosses MA5 to confirm reversal
Close when the new trend weakens or divergence signals appear on the opposite side

Real example: WTI )2H)

1( Price drops to form Double Bottoms, with a Lower Low, indicating continued downtrend 2) RSI enters oversold zone with Bullish Divergence: price makes a Lower Low but RSI makes a Higher Low 3) Buy when the price breaks above MA25, setting a Stop Loss at the previous low 4) Close when the uptrend weakens or Bearish Divergence appears

Warning: Oversold Overbought Is Not a Guarantee of Wins

The Oversold Overbought indicator is a useful tool but not a secret weapon. Relying solely on it can generate false signals. Always confirm with other indicators such as Moving Averages, Divergence, or Price Action.

Remember: All tools have strengths and weaknesses. The key is to use them systematically and cautiously, not to trust a single signal blindly.

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