|Overbought and Oversold|
|Education - STEP 6|
There are many methods used by the Forex traders to trade in the Forex market and one of these methods is to keep an eye on the Oversold and Overbought conditions of the market. Overbought is the saturated buying condition and oversold is the saturated selling condition. Trading goes between the two parties in the market. These parties are buyers and the sellers. Buyers wish to buy in the oversold condition because they can buy maximum at minimum price and the sellers wish to sell in the overbought conditions because they can get maximum price for their opened position.
If you have been a trader and traded either in the Stock market or the Forex market then you must know that entering a position in the Forex market either at the top or bottom of the prices of any currency is impossible. Closing a position at the highest price and opening a position at the lowest price is not possible even if you use multiple technical indicators. Sometimes you may enter a position too early and the price of the currency goes further down and sometimes price may race from the highest price or the lowest price. Sometimes the price of the currency may remain in its situation of oversold or overbought for a longer period of time.
There are many indicators that give signals of overbought and oversold conditions such as RSI, Stochastic etc. Different Indicators show the Overbought and oversold conditions on the chart in the different manner. Let’s observe the different pattern of identifying the signals of overbought and oversold conditions using different indicators.
Drawing Overbought and oversold areas on the chart using Stochastic Indicator
It is as simple as marking points on the chart. Open a chart and then go to Insert menu, click Indicators, click custom and select Stochastic. The tool will automatically draw the stochastic lines below in the chart. Now in Stochastic lines drawn, mark the points that value higher than 80 on the scale and this marked area is overbought area on the chart. In the figure below, points A, B, C and D are overbought. Now find the points that value less than 20 on the scale and mark the area. This marked area is oversold area in the chart. Look at the example in the figure below.
Drawing Overbought and oversold areas on the chart using RSI Indicator
It is as simple as marking points on the chart. Open a chart and then go to Insert menu, click Indicators, click custom and select RSI. The tool will automatically draw RSI below in the chart. Now in RSI drawn, mark the points that value higher than 70 on the scale and this marked area is overbought area on the chart. In the figure above, points A and B are overbought. Now find the points that value less than 30 on the scale and mark the area. This marked area is oversold area in the chart. Look at the example in the figure below.
Knowing of Overbought and oversold areas will make the work of earning profit much easier for the Forex traders and investors. Traders can use any relevant indicator to know the existence of overbought and oversold conditions but the traders and investors should not depend on only one indicator. They should use mix of indicators.
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