This statement is quite subjective. Overbought and oversold have come to be a throw away statements; the same as saying that the market has moved up or down some range without any reversal. Something this vague is of limited use to a trader. It is floating to the new price as it should. Of course in the real world they never work like this. The valuation of currencies, stocks, bonds and most other assets is open to interpretation.
The market is always trying to find this fair value because buyers will not want to buy above fair value and sellers will not want to sell below fair value. By and large markets are pretty good at getting close to fair value most of the time. Extremes tend to happen at times of rapid changes. At these times fair value and market value are not the same.
They can be wide apart. The more volatile and less liquid the market is, the bigger these swings around the real value can be. It might take a bit of investigation but this knowledge allows us to better understand if the new level is warranted and anticipate what may happen next. All of the above situations can happen in forex markets.
Some actually happen on a daily basis. Though these might cause the market to overshoot or undershoot in a trivial way. Trading on these events can be very profitable — providing the timing is right.
Liquidity black holes can cause enormous price movements in a short time. So can mass hysteria but these events can last for a long period of time — sometimes years. Both are special situations that need careful analysis. This effect can be measured on most of the major pairs and many of the minors as well. The table above shows the percentage of times that a correction happened after the market reached an overbought or oversold level.
The data covers the past decade and is from the H4 chart four hour. What this test proves is that most currencies do show evidence of pushing back the other way after reaching overbought or oversold levels.
The strength of that push is often proportional to the amount the market is oversold or overbought in the first place. The opposite is true of sellers. This is a case of seeing what you want to see. When a trader enters too early, what can happen next is that the market extends further and further against their position until they are forced out — often just before the real correction happens.
While there are many indicators out there that will do the job, nothing beats inspecting the chart yourself to get an idea of what is going on. None of the above is consistently reliable on its own. But looking together gives a clearer picture and allows you to get a feel for if the market is heavy on one side or the other.
Often the catalyst can just be a market close — like a weekend or a public holiday. This break gives traders and analysts time to digest the current state of affairs. Sentiment changes dramatically as the market reopens. If good or bad news is anticipated by a few in the know, the price will start to adjust shortly before the official release.
Carry trading has the potential to generate cash flow over the long term. This ebook explains step by step how to create your own carry trading strategy. It explains the basics to advanced concepts such as hedging and arbitrage. If the rumor turns out to be wrong, the market will snap back sharply in the other direction. But if the rumor turns out to be true, the market can still pullback — though not by quite as much. This pullback happens due to positions being closed to book profits.
This can push the price to a more extreme overbought-oversold level. This raises the odds of sharp pullback after the news officially breaks, which we can trade on. Leave this field empty. Market commentators often use the words overbought and oversold quite loosely. Want to stay up to date? Just add your email address below and get updates to your inbox.
Leave this field empty if you're human: The Bearish Breakaway A bearish breakaway is a chart formation that can appear in a rising market when the price starts to The Bullish Breakaway A bullish breakaway is a chart reversal pattern that can appear in either a bullish or bearish market Time them right you can potentially capture a strong move in the market Leave a Reply Cancel reply.