Overbought and Oversold Points: Two Fundamental Facets of Trading

Trading in the asset and crypto-asset markets is a task that requires a lot of attention to detail and technical knowledge both at the level of trading in general, and of the particular asset in question.

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To trade you have to have a strategy

Thus, we must understand that trading must be based on a strategy, a personal strategy and a series of appropriate tactics to achieve this strategy.

Knowledge of chart indicators and patterns is the cornerstone to understand what is happening in the market at a technical level, and knowledge of the news related to the asset we operate is vital to be able to carry out a fundamental analysis in this regard.

Both fundamental and technical analysis should be the basis of decision for any entry (whether buying or selling) in trading and for the strategy and tactics that we use to operate in the markets.

But what you have to assimilate very well is that...

You have to know when to enter the market (both buying and selling), because if we do not master this part well, we will enter at the wrong time, we will buy assets at too high prices, and just in that particular moment, after buying like this, it will be visualized that the price will go in the opposite direction to the desired one.

Regarding this, what you have to understand very well is that:

Never go to buy on an overbought asset and never sell an oversold asset

So, a general rule that we all traders must have when operating in the markets, is that we should never buy an asset that is overbought, and we should never sell an asset that is oversold (at least on those particular moments) and the reason is very simple, because when it is overbought, the price of the asset will tend to fall (or at least it is the highest probability that it has) and when the price of the asset is oversold, it will tend to rise; therefore, it should not be sold, it is a simple law of supply and demand.

As a general rule, when an asset is overbought, then we sell, but if you have nothing to sell and are looking for tickets to buy, then you should abstain in those cases. In a similar way it happens in the opposite case, that is, when an asset is oversold, you should not sell, but on the contrary, look for a point to buy more if you have liquidity for it.

If all you have is the asset you want to sell, then it is advisable in the event that the price is in the oversold zone is to wait until it reaches the overbought points to sell.

But how do we know when an asset is overbought or oversold?

There are many ways, but one of them is through the RSI technical indicator (Relative Strength Index).

But let's take a look at it through an example. The following graph is of Litecoin (LTC) in 1 minute timeframe.

The line chart that we see below the price chart is the ADX indicator that I have set on it to show you.

To understand what has been explained, the green circles are overbought areas, and the red circles are oversold areas. More technically, any movement of the line of this indicator that exceeds point 70 is an overbought zone, and any movement of the line of this indicator that falls below point 30 is an oversold zone.

Another important thing

Having seen and understood what has been explained, it is easy to realize that the implementation of this indicator in our operations can help us not only to make entries at the appropriate times, but also exits; and by exits, I mean those moments (when buying or selling) when we must take profits or even cut losses.

Of course, for this, the strategy that we have in the market when operating plays an important role, because if we do not have clear theoretical criteria or delimitations of what we want and what has to occur in the price of the asset so that we achieve our profit objective , then we will not know how to take benefits on time, when it is necessary to do so, and we will not know how to cut losses when it is advisable to do so.

But having a clear action strategy and seriously defined criteria, it is easy to use the RSI to better trade the markets, and if you don't believe me, check it out for yourself.

Please, comment your opinions on the subject discussed. See you!!