Overbought and oversold are two terms that are very familiar to traders who use momentum indicators. It helps a lot in estimating the strength of the trend and predicting the possibility of a reversal. However, for many new traders, this concept is still very much misunderstood. Importantly, these misconceptions are all fatal mistakes. If we continue to keep it in our heads and apply it, it is really a loss for us.

"Up to the overbought zone, down to the oversold zone is a signal that the market will reverse." This is one of the lessons that when starting to study technical analysis. Therefore, when the RSI drops to 30 or goes up to 70 until the account burns out, then the RSI drops to the 30 zone is similar to the Stochastic down to the 20 zone, and the world has not changed, maybe the trend is stronger.

Since then, learn from experience that this is a wrong definition, and until now still assert that it has never been correct. But in fact, this knowledge still exists and is passed on to many people. Don't worry about it, because not only Vietnam, but also other foreign traders have the same misconception, and they all have to pay a very expensive price.

There are a few examples for new traders to show you that when momentum indicators like RSI, Stochastic fall into the overbought - oversold zone, the price not only does not reverse but also runs stronger:


The above is an example of 2 oversold areas showing a strong increase in price and 2 overbought areas corresponding to a very nice decrease in price.

Or in that these are the areas that are easiest to trade, least risky and have the most entry points, trade pullbacks also have entry points, trade breakouts are also many ways.

Now, let's find one more clear example of trend and the misconception of trend reversal.


This example seems clearer than the one above. We can easily see a very nice uptrend but the Stochastic is overbought 3 times, and the last time Stoch stayed above 80 for the longest time.

At this 3rd time, the price increase seems to be very sustainable, neither comfortable nor too steep, the next wave is stronger than the previous wave. Suffice it to say that when the price falls into what is considered the extreme zone of the market, not only does it not reverse, but it is also a very good buying and selling opportunity.

SO HOW TO UNDERSTAND ABOUT OVER BUY - OVER SELL?

Overbought and oversold areas are areas that indicate which session the market is really leaning towards and which side is overcrowded. For example, there are too many buyers and overwhelming sellers, it is called overbought. If the seller is too crowded, it is called oversold. Explain that for you to understand, if you want to study more deeply, read more books.

Therefore, it does not mean a reversal at all. Not only that, it also shows the trend to enter a clearer, more sustainable state, giving traders more opportunities.

Therefore our strategy is to continue with the trend or at least not think that the market has reversed to avoid an irrational reversal.

As for divergence, the story of the reversal due to this phenomenon has already been said, it has nothing to do with overbought and oversold, we should not lump it together.