Forex overbought oversold strategy games

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Why do markets become overbought or oversold? Of course in the real world they never work like this. The valuation of currencies, stocks, bonds and most other assets is open to interpretation. The market is always trying to find this fair value because buyers will not want to buy above fair value and sellers will not want to sell below fair value. By and large markets are pretty good at getting close to fair value most of the time. Extremes tend to happen at times of rapid changes.

At these times fair value and market value are not the same. They can be wide apart. The more volatile and less liquid the market is, the bigger these swings around the real value can be. This is displayed in Figure 1. It might take a bit of investigation but this knowledge allows us to better understand if the new level is warranted and anticipate what may happen next.

Some actually happen on a daily basis. Once price exhibits these extreme market conditions, probabilities say that a market reversal is likely to be on the cards. Overbought Market Conditions Overbought market conditions can be visualised on your charts by applying a simple RSI indicator to your trading platform. This signals that the market is overbought and a potential shorting opportunity. While the term overbought is used to describe a market believed to be trading at its upper bounds, it should never be treated as gospel.

For best results, always use a signal such as this in conjunction with other methods of analysis. But more on that in the section below. Oversold Market Conditions Oversold market conditions can be visualised on your charts in the exact same way. As oversold is the mirror image of overbought market conditions, this signals that the market now offers a potential opportunity to get long.

Just keep in mind that when a market is oversold, it can continue lower. An RSI signal that a market is oversold alone should never be enough for you to immediately buy a dip. Searching for Confluence is Key When making a decision to go long or short, overbought and oversold signals should never be used in isolation. That saying is made for trading overbought and oversold signals. Buying the dip thanks to an oversold indicator reading alone would be the definition of trying to catch a falling knife.

We mentioned above that you could consider adding trend lines to look for overbought conditions that form as price runs into resistance. But whichever supplementary forms of market analysis you use, finding confluence in what each of them are indicating is the key. How to Trade Overbought and Oversold Conditions Overbought and oversold trading signals are notorious for providing early, or false signals — Especially on the lower time frame charts.

To filter these false signals, let's take a look at a three step trading strategy that, for best results, should be applied to your daily charts.