Oversold is a trading term used to indicate that an asset is trading at a lower price than its real value and has the potential for a price bounce. Oversold is the opposite of overbought. When an asset becomes oversold, there is no known reversal period.
Different technical indicators are used to measure a cryptocurrency asset’s oversold status and show estimations of when the condition is likely to reverse. Most times when the reversal is proposed to occur is based on “if” conditions. For instance, technical traders may observe that a reversal will only happen if a certain price level, often called a support level, is reached.
An oversold condition of an asset can last for a long time. Hence an asset being oversold doesn’t mean a price rally will come soon, or at all. Many technical indicators specify oversold and overbought levels in the trading chart. These indicators base their observation on where the price is currently trading relative to previous prices. It doesn’t take into consideration fundamental data on current market trends.
George Lane’s stochastic oscillator, which he developed in the 1950s, examines recent price movements to identify changes in an asset’s pace and price direction. It indicates 20 as an oversold level. The RSI (relative strength index) measures the momentum behind price movements over a recent period, typically 14 days.
A low RSI, generally below 30, indicates to traders that a stock may be oversold. This means that the price of the coin is trading in the lower third of its recent price range. This doesn’t mean the price will bounce immediately. Many traders wait for the indicator to start heading higher before buying since oversold conditions can last a long time.
How Reliable Are Overbought and Oversold Levels?
In financial market trading, technical analysis is used to anticipate price movement based on past price data. Because they trade based on probability, they try to increase their chances of success as much as possible.
The overbought and oversold levels are meant to be used as trading strategies to increase the chances of making consistent profits. However, if you try to rely on the stochastic indicator or the RSI signals alone, you will probably lose money on some trades.
The best trading technique is to use oscillators as a secondary confirmation in addition to price action analysis. When you evaluate the reliability of the overbought and oversold level, they can be a great addition to your trading strategy. However, you have to use other technical tools to achieve your financial goals.