zebrafx
ZebraFx.com Representative
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Overbought and oversold are terms often used by traders, but what do they actually mean? In today’s article we’ll discuss them in more detail.
An important aspect of trading is to recognize extremes. This is what we mean by overbought and oversold conditions in the market. Take a look at the chart of GBP/CHF. One will see that the price rose very rapidly but reached a tipping point, and then came down quite dramatically. To understand why this happens in forex, think of driving a car on the highway. If you accelerate at maximum speed you can only go so fast for so long until the engine needs rest. In trading it’s no different as prices can only move up so much for so long. Eventually they come down, which is known as a correction.
How can a trader take advantage of these conditions? Well, the price correction we discussed leads to a trading opportunity. In the long term the price could return in the direction of the trend, however, a short term trading opportunity is to recognize when a currency pair is overbought or oversold and enter the market when a correction occurs. A stop should be placed slightly above the highest/lowest point in the prevailing up or downtrend.
