Master the art of spotting market extremes. Learn how to identify when buying or selling pressure has peaked and the market is primed for a snap-back.
Overbought and oversold zones represent psychological boundaries where the market has moved too far, too fast, in one direction. These zones are calculated using various indicators (RSI, Stochastics, etc.) to signal that participants are becoming "exhausted."
A common mistake for beginners is to sell the moment an indicator hits "overbought." In a powerful trend, a market can stay overbought for a very long time. Never trade solely based on these zones; always wait for a confirmation of reversal (like a break of structure or a candlestick pattern) before betting against a trend.
They are universal in concept, but their "boundaries" can change. For example, some assets are notoriously more volatile and might remain overbought longer than others.
Combine these zones with your broader market structure analysis. If a price is "overbought" on the RSI and it is hitting a major, long-term horizontal resistance level, that provides a much higher-conviction setup.