Overbought and oversold
Also known as: overbought, oversold
Overbought and oversold describe conditions where a technical indicator suggests a 's price has moved further and faster than its recent trading history would typically support, in either direction. A is considered overbought when it has risen sharply over a short period, implying that buying pressure may be exhausted and a pause or pullback could follow. A is considered oversold when it has fallen sharply, implying that selling pressure may be overdone and a bounce could follow.
These labels come from momentum oscillators such as the , which compares the average size of a 's recent gains with its recent losses, and the , which compares recent closing prices to the over a lookback period. Both produce a reading on a bounded scale, commonly 0 to 100. Readings above roughly 70 to 80 are typically flagged as overbought, and readings below roughly 20 to 30 are flagged as oversold, though the exact thresholds vary by indicator and by how a trader has calibrated it.
It is important to understand that overbought and oversold readings are not the same as a prediction that a reversal is imminent. A in a strong can stay overbought for an extended stretch as it keeps climbing, and a in a strong can stay oversold for a long time as it keeps falling, since these indicators measure the speed and extent of a recent move rather than whether that move is justified by the underlying business. For that reason, traders generally treat overbought and oversold signals as a prompt to watch for confirmation elsewhere, such as a change in trend or a candlestick reversal pattern, rather than as a standalone trigger to buy or sell.