An asset is said to be overbought when it is being purchased by more and more investors over a period of time, thereby increasing its price without any noticeable market rationale.
Usually, when a coin is considered overbought, a complete reversal of the asset price is expected soon. However, this is not always the case as an asset can remain in the overbought territory for an extended period, especially in the crypto space, where whales easily manipulate the market.
Identifying an asset trading in the overbought territory is crucial to active traders. This helps see profitable trading opportunities in the market, and technical indicators are the most common tools.
What is the best overbought/oversold indicator
You may have guessed it already. Oversold simply is the opposite of overbought, and both phenomena can be best identified based on factors such as the cryptocurrency’s trading volume, recent price history, price momentum, etc.
Technical indicators such as RSI (Relative Strength Index), Bollinger bands, and Stochastics aid in the analysis of identifying an overbought/oversold asset considering a combination of many factors.
RSI, one of the most popular indicators, takes into account recent price actions to calculate overbought/oversold regions for an asset. Measured between 0 -100, an asset rated above 70 is considered overbought and oversold when rated below 30.
Bollinger bands are another price momentum indicator depicted by a centerline representing the average price over 20-Periods and two outer bands representing the upper and lower levels of a 1% standard deviation by default.
A combination of technical and fundamental analysis is a key approach used by experienced traders. However, understanding some indicators and the factors they consider when reading market information should suffice in identifying an overbought/oversold asset.