One our students recently asked us this question: "You use the terms over bought and over sold at times. What do they mean? and how can they help to find a profitable chart?"
Oversold simply means that the stock price has reached a TEMPORARY bottom and buyer are most likely ready to come in and buy shares.
Overbought is the opposite. Stock price has reached a TEMPORARY top and sellers are most likely ready to come in start closing positions or go short.
Use oscillators such as stochastics and RSI to visually help you identify when price has reached oversold or overbought conditions.
When the lines of the oscillator cross above 80 and higher the stock is overbought. Get ready to sell and close positions. When the lines of the oscillator cross below 20 and lower the stock is overbought. Get ready to buy.
Keep in mind that is just one parameter we look at.
In your analysis you need to see where support and resistance is and how price behaves around these areas. Also pay attention to candlestick formations that indicate reversals and condition patterns as well as consolidation and breakout patterns.
Good Trading!
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