Can you tell me how to identify when overbought occur??
It's difficult to identify it...
The Definition of Overbought
- Technical analysis would describe the situation of being overbought through use of indicators, the most popular being oscillators. The most popular indicator for measuring whether an asset is overbought is a stochastic. The asset is considered to be overbought when the stochastic oscillator has reached it's upper levels, usually the 20th percentile (above 80). When the oscillator is at its upper levels there could be a price reversal.
- Overbought from a fundamental point of view is a situation when a particular asset has increased in value groundlessly where the value of the asset does not reflect the available fundamental data.
overbought or oversold). One can however use some technical indicators such as bollinger bands, oscillators (i.e. Stochastic), study where price for the particular currency pair has tended to stop and reverse on those indicators.
This will give a general rule of when something is overbought and oversold: But it doesn't mean price will turn around at this point. Sometimes it will continue, and continue and continue and not return to a particular prices for years, or even decades!
I wouldn't base the entire entry on an indicator like this though. Try to use these indicators as indicators, to help complement your current strategy, to get in and out of trades with more precision.
Markets can remain irrational longer than you can remain solvent.
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