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What is overbought and oversold in RSI？
Excessive buying of an underlying financial transaction is called “overbuying” and, conversely, excessive selling is called “overselling.” Before learning to identify overbought and oversold indicators, it is important to have a general understanding of them. The so-called overbought and oversold indicators are caused by the inertia of the price trend.
The OBOS research and judgment method is mainly the index line, and the OBOS line is linked to the judge again. With the average volume of the same method of identification, if the two lines are together, it is a good phenomenon; if the two lines are together, it is a bad market; the index line is up, OBOS is down, indicating that many small-cap stocks have gone downhill. The reason is very simple: the index is composed of many stocks. The index rose, indicating that the weight of large-cap stocks is still rising. While OBOS is not a weighted algorithm, it only counts as a number. The OBOS decline indicates that many stocks throughout the market are falling, but the shares that are down in the index account for little weight in small-cap stocks. Nevertheless, the decline of small-cap stocks indicates that the stock market will turn weak, so it is a sell signal. Similarly, if the index is falling but OBOS is rising, it indicates that small and mid-cap stocks have taken off, which means the stock market is about to reverse.
Through the KDJ and RSI indicators to analyze, we know that its normal range of fluctuations is between 20 and 80. We can therefore assume that if the range of fluctuations exceeds 80, we are overbought, while below 20, we are oversold. Obtuseness occurs when the indicator stops in the overbought and oversold zone for more than 3 trading days.
Overbought and oversold (OBOS) is an analytical tool to measure the general trend of up and down momentum. Its simple calculation and analysis method are also simple, but very practical. For example, if the first day saw an increase of 20 stocks and a decrease of 29 stocks, the value of OBOS2 is 20 + 29-(10 +1) = 38.Of course, in the actual analysis, the value of these N days It generally takes about 10 days to be appropriate.
In the stock market, there is often the spread of some kind of news to make investors react strongly to the general market or individual stocks, which causes the stock market or individual stocks to rise or fall excessively, and then the phenomenon of being overbought and oversold. When investors’ emotions calm down, the impact of being overbought and oversold will gradually be properly adjusted. Thus, an overbought stock will be followed by a fall in the stock price, while an oversold stock will be followed by a considerable rebound. Investors who understand this overbought and oversold phenomenon and grasp its movement pattern in time will again be able to increase their profit opportunities in the stock market.
The key here is how to measure the oversold and overbought phenomena in the stock market in a timely manner. There are many technical analysis methods to measure the overbought and oversold phenomenon, mainly the Relative Strength Index (RSI), Oscillator Index (OSC), Stochastic Index (KDJ), etc.
Also Read: What is RSI? How is the RSI value calculated?
Reversal Trades
Analysis of historical situation records shows that trading in a reversal can achieve an 80% success rate. There are two ways to determine whether a stock price will reverse in a short period of time.
- 1, the existence of a backward situation. This means that the stock price is at new highs and lows when the indicator is not at new highs and lows, which is backwardation. There is even a situation where the stock price is at the opposite of the new high and low of the indicator, also known as a “hook,” which means that it is time for us to reverse the operation.
- 2, since there are many analysts who refer to common indicators, distortions can occur. Therefore, it is recommended to refer to some other technical indicators or adjust the time parameter of the indicator a little longer, so that its changes are not too sensitive and the reference ability is also improved a lot.
How do you know if I have overbought or oversold?
【1】KDJ indicator: In general, K value and D value greater than 80 indicate an overbought area. At this time, we should be cautious and consider selling according to the situation; value below 20 indicates an oversold area, and according to the situation, we can consider buying.
[2] MACD indicator: white line up through the yellow line appears golden cross for overbought area, investors can appropriate buy; white line down through the yellow line appears death cross for oversold area, investors can slowly ship.
[3] Bollinger Bands indicator: the stock price is in the rising stage, break through the upper rail for overbought area, at this time the big money has begun to take profits out, investors should reduce positions at high. The stock is in the decline phase and the track has formed a downward channel for the overbought area, buy the stock may fall, holding the stock investors should also stop loss in time. Overbought and oversold is the case of excessive buying and excessive selling, which is usually a signal that the market is too hot or too cold, often a turnaround, but of course ultimately need to be analyzed in conjunction with the market and other aspects.
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