Over sold/bought ??????

This may sound like a dumb question but I really do not get it. What makes a currency oversold or overbought? The GBP was said to be over bought but it did not move all that much compared to what it has before. It moved a little over 100 pips. I know RSI and sholatics show over bought and it uses some formula. I've seen the GBP move like 300 pips more of less and did not see that it being over bought or oversold. What then would make a currency overbought or oversold. I'm so confused.

Fdisk

I don't know about the technicals but from a fundamental perspective there doesn't seem to a be set definition: I've seen it used if different situations, in part reflecting different time spans. For example, it can be used in relation to PPP (purchasing power parity) or other long-term or short-term model valuations, it can be used when comparing against historic highs and lows or against long term averages.

Indeed, even without these indicators, whenever I take a view, I usually do so because I think a currency is in overbought or underbought territory, as I like to bet on reversals. In the fundamental world at least, it is a pretty general concept.

: )

I dont quite buy the idea of oversold/overbought levels. Who is to determine what's overbought oversold? definitely not an indicator, as the market doesnt know or care about them. The market only cares about supply and demand, and as long as we keep having the bulls beating the bears, the currency pair will keep going up regardless of whatever any indicator says.

I mean, look at the USDJPY. Everyone and their mother kept screaming "overbought!!!" ever since 115.00, yet it continued pushing mighty strong for over 600 pips more.

Overbought/oversold indicator-derived levels can be somewhat significant in sideways range-bound markets, but if it's trending you can keep going overbought/oversold for a looooong time.

Well it really doesnt matter what formula does the indicator use to calculate an overbought/sold level, but what matters is what it is trying to reflect.

An overbought level is a psicological barrier where the humans behind the trades tend to start to think "isnt it time to sell?" "will it go any higher" or as i like to call it the beggining of the end (of the trend).

As WTB said, if the trend is strong it can sustain an overbougt/sold level for a long time because the reason why the currency is trending is good enough for people to keep reasonal and remain buying. But it wont sustain forever

Thats how i like to read the overbought/sold levels. I hope it helped

Totally agree, well put...

Notice something very important, the pair was actually overbought since the 115 level was reached, not because of indicators, but because of common sense...It shot up for another 700 pips actually to 122 because people were dragged at the non-ending trend thing...

If you notice how the pair kept rising above the 115-116 area and creaping up, slowly at first and then with a burst at the 120 level, you should have anticipated the end of it...Look at how it collapsed back to 114 in just 2 weeks or maybe less, which suggests that the 120 levels were insane and big big money went buying the Yen and shorting the USD, just as it happened in the US stock market in late 1999 and early 2000, sharp run up to insanity and then followed by sharp drop and you have a nice V turn...

I am not defending the pair or anything, I am just saying that one needs to identify real demand and supply from fake ones, and differentiate between sound demand and supply and insane ones.


Thanks,

Nader

Hello Nader,

The way I see it is that markets are too complicated and have their own "will" for us to actually understand or foresee when a currency pair is overbought or oversold, let alone an indicator. Why did USDJPY fall 500 pips in a burst? it could be a number or reassons:

1) We are at the end of the year and large inverstors that have been profitably long for the whole year close down their possitions for profit taking before Christmas holidays. It's certainly not the first time we see trend reversals at this time of year.

2) Secondly, there was a massive trendline confluence in the weekly chart at 121.50 (see screenshot below), so it was sort of expected the bounce to the down side. In fact, I had that 121.50 area marked in a post-it sticker next to my computer, but the bounce has been so violent that it didnt generate a valid signal according to my entry filters, so I havent benefited from the move

In my opinion, one cannot and should not try to estimate overbought/oversold levels as that is like trying to pick tops and bottoms out of the blue (a technique that has never worked for me). In stead, I advocate to let the market move wherever it wants to move and, once the move has started and confirmed, jump in for the ride. But that might perfectly be just my trading style. If anyone is able to actually determine beforehand when a pair is overbought/oversold and enter the market before the move has actually been originated, more power to him! I personally do not think it's the way to go.

lol