What are Overbought & Oversold Condition (OB/OS)?
Overbought (OB) is a term in technical analysis describing a condition when the price of a financial instrument increases so much that the buyers loses its faith and believe that a correction is due, selling pressure becomes dominant, results in decline in price.
Oversold (OS) is just opposite of overbought where the sellers loses its faith and believes that the price wont go down further and a rally is due and buyers wins the battle and the price starts moving up.
Types of indicators used to determine Overbought and Oversold Condition?
There are different indicators used for determining the overbought and oversold conditions. The common among are:
1. Relative Strength Indicator (RSI)
How to utilize Overbought and Oversold Indicator in trading?
Buyers always wish to buy at oversold condition because they can get maximum in minimum price while sellers always wish to buy at overbought condition to get maximum benefits of their stocks in terms of price.
Traders can use any indicator to find the overbought and oversold condition but they should keep in mind that overbought doesn’t always mean a selling signal and oversold doesn’t indicate a buying signal. Its a condition showing the extremes price levels of the stocks, therefore traders can pay attention when they are giving a buy or sell call. However a buy signal can be generated by adding one or more technical indicators like volume, MACD, etc. to oversold condition. In the same way a sell signal is confirmed by adding other technical indicators to overbought condition. In order to book the maximum profit a traders must look at the other major trends and patterns in conjugation with the overbought and oversold condition to get maximum benefit.