## Overtrading and Overbuying in Price Analysis: Essential Tools Traders Must Know

In the general trading community, one of the most common problems leading to frequent losses is entering buy or sell positions at inappropriate prices. The phenomena of **Overbought** (overbuying) and **Oversold** (overselling) refer to market conditions where assets are sold or bought excessively beyond what is justified. These are technical analysis tools that help traders avoid poor entry points.

### Basic Meaning of Overbought and Oversold

**Oversold (selling too much)** occurs when an asset is sold excessively, causing its price to fall below its fair value. This signal indicates that selling pressure is waning and buying interest may soon re-emerge. At such low price levels, buyers start to show interest, and the price tends to recover.

Conversely, **Overbought (buying too much)** indicates that an asset has been purchased excessively, pushing the price above its fair level. This overbuying often leads to a price correction as buying momentum weakens and sellers begin to take profits.

These two conditions are not based on the fundamental **Fair Price (Fair Price)** but are measured by price momentum using historical price and volume data.

### Tools for Checking Oversold and Overbought Conditions

#### RSI (Relative Strength Index)

**RSI** is a widely used momentum indicator that measures the ratio of upward price movements to downward movements over a specified period. It is calculated with the formula:

**RSI = 100 - (100 / (1 + RS))**

where RS is the average of upward price changes over N days divided by the average of downward price changes over the same N days.

The resulting RSI value ranges from 0 to 100, which can be interpreted as:
- **RSI above 70**: Indicates Overbought, suggesting a potential price correction or reversal
- **RSI below 30**: Indicates Oversold, suggesting a potential price rebound

However, the thresholds of 70 and 30 are standard and can be adjusted based on the asset's price behavior.

(# Stochastic Oscillator )%K and %D###

**Stochastic Oscillator** indicates where the current closing price is within the high-low range over a specified period. The calculation formulas are:

**%K = [(Close – Lowest Low 14 days) / (Highest High 14 days – Lowest Low 14 days)] × 100**

**%D = 3-day moving average of %K**

The %K value ranges from 0 to 100, with interpretations as:
- **%K > 80**: Overbought
- **%K < 20**: Oversold

( Practical Application in Trading

)# Strategy 1: Mean Reversal (Trading when prices reverse)

**Mean Reversal** assumes that extreme highs and lows are temporary, and prices will eventually revert to the mean. This strategy works well in sideways markets (Sideway) without a clear trend.

**Steps to use RSI in this strategy:**

1### Use MA200 to identify trend direction - if price is above MA200, trend is bullish; below MA200, trend is bearish
2### Define overbought/oversold zones with adjusted thresholds, e.g., Overbought at RSI > 90 and Oversold at RSI < 10
3( Enter buy when RSI enters oversold zone and sell when RSI enters overbought zone
4) Close positions when price approaches SMA5

**Example trading USDJPY (2 hours):**
- Price breaks above MA200 indicating an uptrend, then tests the MA200 again — a signal that MA200 acts as support
- Since it’s an uptrend, set RSI Overbought at 75 and Oversold at 35 instead of standard levels
- Buy when RSI dips below 35 and close when price touches MA25

)# Strategy 2: Divergence )Conflicting signals between price and indicator)

**Divergence** occurs when the price makes new highs but the indicator )such as RSI( makes new lows, or vice versa. This signals potential weakening of the current trend and possible reversal.

**Steps to use RSI in this strategy:**

1) Identify assets with a clear trend, then look for reversal patterns such as Double Top or Double Bottom
2### Check if RSI shows Bullish Divergence (RSI makes new lows but price does not) or Bearish Divergence (RSI makes new highs but price does not)
3) Enter buy or sell when the price confirms trend change, e.g., crossing MA5
4) Close positions when the new trend weakens or divergence signals reappear

**Example trading WTI (2 hours):**
- Price is in a downtrend, making new lows (Lower Low)
- RSI enters oversold zone but shows Bullish Divergence by not making new lows with the price
- Enter buy when price crosses above MA25 and set Stop Loss at previous low
- Close when the uptrend weakens

) Summary

**Oversold means** selling excessively, warning traders that the asset may be oversold and the price could be too low. Conversely, **Overbought** )oversold( indicates excessive buying, suggesting the price may be overextended.

Proper use of Oversold and Overbought signals should be combined with other technical tools like Moving Averages and Divergence. Relying solely on one indicator is not recommended, as all tools have limitations. Building a robust trading system involves integrating multiple signals to identify precise entry and exit points while minimizing risk.