Any form of forex trading requires one to research the market to make worthy trades. One of the tenets of technical analysis is determining overbought or oversold markets. These terms refer to price ranges indicating that an instrument, such as a currency pair, is overbought or oversold compared to several previous trends. Traders need to be aware of such conditions to be early indicators of reversals to enable the trader to trade, for example, at the right time. This guide will discuss strategies for using some of these conditions on JustMarkets, especially the RSI, Stochastic Oscillator, and MACD.
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What are Overbought Conditions and Oversold Conditions?
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- An asset is considered overbought when there is an unrelenting rising price trend which justifies not enough fundamentals. This situation poses a chance of a reversal of prices or a change in general trends resulting from a shift in supply and demand trends. On the other hand, an asset is identified as oversold after a conspicuous down move implying that the price could reverse up again since the selling pressure has probably dried up. Knowing these conditions on Justmarkets would assist traders in purchasing or selling an asset when the currency experiences a correction.
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Using the RSI Indicator on JustMarkets
- Out of all the indicators used for pinpointing the over-extension of the bulls/bears, the Relative Strength Index (RSI) is perhaps the most depressingly accurate. The RSI is a momentum indicator that tracks the velocity of the price movement and decides when an asset was overbought and oversold. Using JustMarkets, traders can instantly load the RSI indicator and apply it to a trading chart.
- The RSI ranges from 0 to 100. A figure above 70 is overbought while below 30 is oversold. For instance, when the RSI of a specific pair such as the EUR/USD is at a high of 75, it will show that the pair has likely been overbought, meaning that the price is likely to drop. However, it is always advisable to use RSI with other variables in the market so as to eliminate distorted signals. Having one kind of metric and analyzing it, traders on JustMarkets can make more accurate predictions, at same time using other indicators.
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Confirming with the Stochastic Oscillator
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- Another useful signal for the overbought and oversold signals is the Stochastic Oscillator which shows us how far the price has gone beyond the moving average. This marker has the closing price of a particular day divided or compared with the prices of that same security over a shorter period to bring into focus potential price reversals better. Similar to the RSI, the Stochastic Oscillator works between absolute zero and absolute one hundred, where a value over eighty indicates overbought and a value under twenty, is oversold.
- When signal confirmation is needed, traders can use the Stochastic Oscillator on JustMarkets in parallel with the signals from the RSI. They recommended that when the RSI and the Stochastic Oscillator both move on the overbought or oversold regions then there will be a high chance that a trend reversal is probable to occur. For example, if both indicators give an overbought signal for a currency pair then one needs to think of selling or selling short.
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Leveraging MACD for Added Insight
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- Another valuable technical indicator that can be used to determine the overbought and oversold levels is the Moving Average Convergence Divergence (MACD). MACD gives a distinct picture of the trend strength and can predict the signals of a reversal in trends.
- The crossover points can be found using the MACD indicator which traders can set up on the charts available at JustMarkets. When the MACD line moves below or below the signal line it means a sell signal which could signal an overbought situation. On the other hand, when the MACD line crosses over the signal line, it acts as a bull indication showing possible oversell.
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Tips for Accurate Analysis
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- Nevertheless, trading determined solely on an indicator provides incorrect signals and unusably inadequate results. These indicators are important for JustMarkets traders to employ to build up their system and vice versa. However, more caution is recommended as market correction may take some time. Information tracking when it comes to economic events and news of the currency pairs is also important to make a decision.
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Conclusion
- One of the most valuable abilities of forex trading is the ability to identify overbought and oversold situations to make a trade accurately. By applying the RSI, Stochastic Oscillator, and MACD indicators to the platform JustMarkets, you can have rather efficient tools for identifying such circumstances. Thus, to improve the performance of the traffic, traders should analyze these indicators simultaneously and follow the market news.
