What is oversold on ?
oversold level (oversold) - an exchange term most commonly used in technical analysis and stock market analysis to define an area of the price chart that has formed as a result of continuous sales of an asset by traders and investors such that its market value has become clearly below its real value.
The essence of the concept of oversold
In order to understand the essence of oversold on , you need knowledge of fundamental analysis concerning the formation of supply and demand in the financial markets.
When there are continuous sales in a currency pair (asset), there is a significant outnumbering of bears over bulls in the market, which leads to the fact that the sellers' forces are exhausted. The levels where the price is in this case are called levels or oversold zones.
When the price is in the oversold zone, sellers begin to fix profits on short positions, so the price of the asset begins to rise, and the bulls begin to build long positions, buying the asset at a lower price.
On the price chart of the currency pair this process looks like an upward correction followed by a resumption of the downward trend, or the end of downtrend with the market reversing to an uptrend.
The mirror process of the oversold level is overbought levelThe result of which is a downtrend or a market reversal from an uptrend to a downtrend.
How to determine if the market is oversold?
The oversold level is a relative concept. To determine it, overbought/oversold indicators are used, which, as a rule, are by oscillators.
To determine the oversold and overbought condition in such indicators, there are special levels, the crossing of the signal line of which is a sign that the price has entered the oversold or overbought zone.
For example, in one of the best standard RSI indicators When the price enters the oversold area, the signal line of the indicator crosses the 30 level.
How to use oversold in foreign exchange market trading?
Understanding the essence of oversold prices will help the trader correctly and timely determine the turning point of the price and fix profit in a deal or open a new one in the direction of a new trend at the very beginning of its emergence.
It should be understood that in a downtrend the sales are the defining process, so the signal line of the overbought and oversold indicators will be in the immediate vicinity of the corresponding oversold level. Crossing this level will be a sign that the price has entered the oversold area and the downtrend is more likely to enter the upward correction phase or turn around.
However, the oversold and overbought indicator signal is not a full signal for entry, but only warns of the possibility of correction or trend reversal, and needs to be confirmed by a signal trend indicator or volume indicator.
Oversold and overbought indicators are an integral part of trend-following strategies, as well as trading advisors.