Can you tell when the currency is overbought or oversold? | Forex Factory

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Can you tell when the currency is overbought or oversold?

  • #1
  • First Post: Edited 10:48am Feb 26, 2023 10:26am | Edited 10:48am
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So Guys, the above screenshot shows that the NZD was the strongest and that the AUD was the weakest currency, on that particular day that the screenshot was taken.

We know this, because the NZD rose against all the other 7 Currencies and the AUD fell against all the other 7 currencies, on that day.

The question is, can we figure out a way to determine when the NZD is now overbought, so that it can be sold and how can we tell when the AUD is oversold, so that it can be bought?

Any and all ideas are welcomed.
  • #2
  • Feb 26, 2023 11:33am Feb 26, 2023 11:33am
From this correlation matrix I think you can't conclude if the pair is overbought or oversold because arbitrageurs quickly restore equilibrium
  • #3
  • Feb 26, 2023 1:40pm Feb 26, 2023 1:40pm
Give us a hint on which time frames are you looking at?

We can assume 15M to 1-Hour I suppose because you said on that day; not looking for that yearly low or high?

And the type of trading? Again, I assume intraday swing entries.

Looking at your time zone, my theory of USA traders is that they are reversal traders because by the time their markets open, most of the daily moves have been made.

Whereas Asian time zone traders can be trend traders, even for the day, because they recognize the start of a move.

Overbought and oversold, also known as oscillating, if you want to go down that rabbit hole, this is the book to study for that.

PM for further details (not selling anything MODS)

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It takes a lot for me to IGNORE you, but you can try.
  • #4
  • Feb 26, 2023 4:21pm Feb 26, 2023 4:21pm
The screenshot shows movement if each currency pair in pips, at the end of each trading day.

So the strategy would be based on daily values.

The values are determined by calculating the difference between the daily open and the daily close.
  • #5
  • Feb 26, 2023 4:32pm Feb 26, 2023 4:32pm
The issue I am having with some indicators is that that these indicators are calculating the average of say the last 14 day values to predict a certain outcome. For example to determine whether the currency is oversold or overbought.

I rather look at the values for the currencies at the end of the last day and see whether these values can determine whether its time to buy a currency or sell a currency, on the next day.
  • #6
  • Feb 26, 2023 4:47pm Feb 26, 2023 4:47pm
Quoting DragonChaser
The issue I am having with some indicators is that that these indicators are calculating the average of say the last 14 day values to predict a certain outcome. For example to determine whether the currency is oversold or overbought. I rather look at the values for the currencies at the end of the last day and see whether these values can determine whether its time to buy a currency or sell a currency, on the next day.
Hi mate ! The less data, the less to observe, the less to put to use... I don't understand what you are doing. Can't wait for further examples and explanations. Cheers !
If I don't mention SL and/or TP = longer-term setup possibly in the works!
  • #7
  • Feb 26, 2023 5:08pm Feb 26, 2023 5:08pm
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Those were the values at end of day Friday, February 24, 2023.

It shows that the USD was the strongest currency and the JPY was the weakest currency, last Friday.

So the question is, how can we predict whether the USD currency will lose its strength today, the next trading day, or increase in strength.

Likewise, how can we predict whether the JPY will continue to weaken today, or gain strength?
  • #8
  • Feb 26, 2023 5:17pm Feb 26, 2023 5:17pm
There is no such cheat code. If there were, there wouldn't be.

If any technique is especially profitable it would be general knowledge and manipulated into nonexistence.

Markets can be irrational longer than your stops. So there is no such thing as overbought or oversold actually. It just says that in reference to a certain time period like the 14 day you mentioned.
  • #9
  • Feb 26, 2023 5:33pm Feb 26, 2023 5:33pm
Quoting DragonChaser
{image} Those were the values at end of day Friday, February 24, 2023. It shows that the USD was the strongest currency and the JPY was the weakest currency, last Friday. So the question is, how can we predict whether the USD currency will lose its strength today, the next trading day, or increase in strength. Likewise, how can we predict whether the JPY will continue to weaken today, or gain strength?
You are assuming that this relation that you are observing has value. I would first prove that the data alone has potential before going on to using it in a second step(your question). Hope that helps. Wishing you the best of luck in your endeavors mate !
If I don't mention SL and/or TP = longer-term setup possibly in the works!
  • #10
  • Feb 26, 2023 5:37pm Feb 26, 2023 5:37pm
The fact that we don't know that something exists, does not mean that it doesn't exist.

I know of a trader who has successfully determined when a currency is over bought and oversold. He is unwilling to share his discovery. He won't even sell his discovery.

I am sure persons were laughing at Christopher Columbus, when he set out to "discover" other territories.
  • #11
  • Feb 26, 2023 6:11pm Feb 26, 2023 6:11pm
Quoting DragonChaser
The fact that we don't know that something exists, does not mean that it doesn't exist. I know of a trader who has successfully determined when a currency is over bought and oversold. He is unwilling to share his discovery. He won't even sell his discovery. I am sure persons were laughing at Christopher Columbus, when he set out to "discover" other territories.
By your last posts, I am inclined to believe that you have not considered what I shared above all, or not understood it, or both. Which is fine. Just giving my humble and friendly 2 cents...

I hope you will find worthier participants for your project. So sorry that I couldn't help mate.

Cheers and have a great week DragonChaser!
If I don't mention SL and/or TP = longer-term setup possibly in the works!
  • #12
  • Feb 26, 2023 6:15pm Feb 26, 2023 6:15pm
Mtako my last post wasn't a response to your post.
  • #13
  • May 2, 2023 11:47am May 2, 2023 11:47am
Quoting DragonChaser
The fact that we don't know that something exists, does not mean that it doesn't exist. I know of a trader who has successfully determined when a currency is over bought and oversold. He is unwilling to share his discovery. He won't even sell his discovery. I am sure persons were laughing at Christopher Columbus, when he set out to "discover" other territories.

this phenomenon exists, it means something different to everyone.
but one thing's for sure, you can't tell with oscillators.
you have to dig deep if you want to know what it really means.
  • #14
  • May 3, 2023 8:34pm May 3, 2023 8:34pm
Can you tell when the currency is overbought or oversold?

Absolutely, that is simply a market condition

A man's brain tells him that he needs a signal to trade that condition is the solution required

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It takes a lot for me to IGNORE you, but you can try.
  • #15
  • May 4, 2023 4:43am May 4, 2023 4:43am
Quoting Erebus
Can you tell when the currency is overbought or oversold? Absolutely, that is simply a market condition A man's brain tells him that he needs a signal to trade that condition is the solution required {image}

for me, the disruption of the market balance is a telling sign. .
  • #16
  • May 4, 2023 10:05am May 4, 2023 10:05am
No.
My signature is: "Classified".
  • #17
  • May 4, 2023 12:36pm May 4, 2023 12:36pm
Quoting dragonchaser
{image} those were the values at end of day friday, february 24, 2023. It shows that the usd was the strongest currency and the jpy was the weakest currency, last friday. So the question is, how can we predict whether the usd currency will lose its strength today, the next trading day, or increase in strength. Likewise, how can we predict whether the jpy will continue to weaken today, or gain strength?
please can you help with this 2 indicator. The one at top and bottom. Thank you.
  • #18
  • May 13, 2023 8:53pm May 13, 2023 8:53pm
Well, basically the term overbought means it’s priced “too high”, higher than it “should” be. People are buying it at prices above what you would expect for the currency/stock/commodity, etc.

But if people are buying it at high prices, that means others are selling it at high prices (the ones selling it to the people who are buying). So why don’t we call it oversold? Again, it comes back to having an idea of what it “should” cost. If it’s above that price, people will call it overbought, below that, and it’s oversold.

So in order to determine if something is overbought or oversold you need to have a way of determining the intrinsic value. This is what fundamental analysis do. They have model (usually based on economic concepts) that tell them what the price of something should be. A simple model for a stock that pays dividends is to simply find the present value of all the future dividends. (There are ways of calculating that exactly, and we can go into that if you want.) Once a stock starts paying dividends, it’s like a stream of cash flow. Surely, the stock should be worth what all that cash is worth, at least. If it’s lower than that, a fundamental analysis would deem the stock to be oversold and might buy it, banking on the idea that it will return to its intrinsic value.

Of course, people might come up with their own, more sophisticated models than this. You could try to come up with some model for determining the intrinsic value of the currency. Your model predicts a price. If the market price is above that, it’s overbought. If it’s below that, then it’s oversold.

From a purely technical approach, you might consider something overbought if it would be very difficult to buy more. What I mean is, if someone wants to buy more, then someone must be willing to sell more to them. If you monitor the order book to analyze the market depth, you might be able to see if there is an imbalance of buy vs. sell orders. If there are large orders to buy, but almost no orders to sell, then does it mean it cannot be sold (so it cannot be bought) so it must come down? Actually, it’s probably the opposite: With no sell orders to meet the buy orders, the buyers will have to bid up to the next available sell orders, so it’s not overbought at all. Keep in mind that the order book only shows pending orders; at any point in time, large market orders could come in and change everything.

In your case, perhaps you could use your spreadsheet data (with a bit more information) and determine an intrinsic value for each currency. Then you could take a ratio of these to get intrinsic values for currency pairs (like the value of USD divided by the value of JPY to get your intrinsic value of USD/JPY).
  • #19
  • May 14, 2023 1:52am May 14, 2023 1:52am
I believe what you're saying is about undervalued/overvalued. You can say it, but not with indicators. But that quickly reaches to fair value. It's Edge within Edge
  • #20
  • May 15, 2023 2:36am May 15, 2023 2:36am
Quoting DragonChaser
{image} So Guys, the above screenshot shows that the NZD was the strongest and that the AUD was the weakest currency, on that particular day that the screenshot was taken. We know this, because the NZD rose against all the other 7 Currencies and the AUD fell against all the other 7 currencies, on that day. The question is, can we figure out a way to determine when the NZD is now overbought, so that it can be sold and how can we tell when the AUD is oversold, so that it can be bought? Any and all ideas are welcomed.
It all depends on your assumption. If your assumption is that weakness leads to more weakness (momentum) then using this table makes sense, however if you think the state is memoryless, then this table has zero value.
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