Overbought vs. Oversold Signals: What Are the Differences?

When an asset reaches an overbought level, it means extreme price movement upside from where the reversal is highly expected. Conversely, the oversold level indicates a possible reversal point after an extreme bearish pressure in the price. 

In any case, if you find extreme bullish or bearish price movements on an asset, it’s a signal for you to exit the market. However, traders often become confused when attempting to differentiate the overbought and oversold signals that may affect their trading results.

In the following sections, we’ll be discussing the core difference between overbought and oversold conditions, including their best use.

What Are Overbought and Oversold?

Overbought and oversold describes the price of an asset correlated to its intrinsic value. This leads to signals representing the market conditions determined by the news, earnings reports, events, and trends revolving around them. For example, the recent Bitcoin plunged based on Elon Musk’s tweet.