The prices in the market are not always continuous moving up or down continuously.At a certain price level has been rising or falling too far away will experience aretracement or correction, before forward movement in the direction of the trend orreverses direction. Prices go up and reach a certain level will experience conditions ofsaturated buy or overbought, and the price is down to a certain level will experience a State of saturation to sell or oversold.
Overbought oversold or conditions likely will happen is a correction, or a reversal of the direction of motion (reversal). Both possibilities can be confirmed with theindicator of the oscillator, the popular is indicators of Relative Strength Index (RSI). Ifunconfirmed explicitely overbought or oversold State is a good trading opportunities.
Overbought oversold versus
Overbought or saturated State purchase shows time periods which occur a significantuptrend movement and consistent without experiencing a correction means. The charttrading situation is evident when the price goes up from the lowest level on the leftbottom of the chart to the highest level on the top right of the chart as shown in thefollowing example:
The State of the oversold or saturated sell shows the period of time which occurred asignificant downtrend movement and consistent without experiencing a correctionmeans. The chart trading situation looks when the price came down from the highestlevel to the left top of the chart to the lowest level on the bottom right of the chartlike the following:
Because the price will not go up or down continuously, on a certain level will turndirection. Level where the price will most likely turn the direction level was overboughtor oversold. Often times the price moves sideways (ranging) on the levels within a rather long before it starts to turn direction. We will look at the level of theoverbought and oversold levels with the help of the indicator RSI and when is the most appropriate trading opportunities.
See the trading opportunities with the RSI indicator
The popular indicators to identify overbought and oversold State is RSI, usually with astandard 14 period. Simple rules, when the RSI has reached level 70 are considered then the price has been overbought and will most likely occur toward correction down (downtrend), while when prices reach 30 RSI level is considered to have been oversoldand correction will occur toward the top (uptrend).
Nevertheless we must rather wait to go in because it's often an indicator of RSI has been overbought or oversold State but prices still go up or down with the firm. In order to be secure, we must wait for the time line of the RSI had cut the lines of level70 from top to bottom for overbought case like the following example, or cut a line of30 levels from bottom to top for case oversold.
check out our signal https://www.mql5.com/en/signals/author/hermanfendyIn the example above a sell entry made after the RSI level 70 cuts from top to bottom(area B), and to avoid entry overbought when things just happen (area A).
