Overbought & Oversold

Overbought and oversold are extreme conditions and are seen when prices have moved because of heavy demand or supply beyond their fair value. Overbought similar to a buying 'war' seen in auctions where determined buyers push prices ever upwards until only one bidder is left. Overbought and oversold are also the terms used when an oscillating indicator is at or near its extreme values.


In the chart below, I have plotted a 3 period RSI indicator below a 15m bitcoin price chart. All of these parameters are chosen at the click of a mouse on your trading platform. The RSI indicator is calculated from the BTC price and ranges between a value of 0 - 100. This indicator is widely used in the technical analysis of financial markets and you can find out more about it here.

Observe how the peaks and troughs in the BTC price are followed by peaks and troughs in RSI. When the RSI indicator is above 80, it is overbought and indicates that BTC prices are unlikely to remain at these levels and will fall back (or revert) to a price where demand and supply of BTC is in better balance. When RSI is below 20, it is oversold because there is excess supply and prices are likely to rise as demand for BTC improves.

BitSignal : RSI - overbought and oversold