When the market is overbought or oversold

Richard Krivo explains a simple method to determine where the currency pair is in the spectrum.
Have you ever heard an analyst say something like “AUD / USD is over and correction in one place” or h “EUR / NZD is oversold and yet repulsive”? This may sound like a pretty compelling information, but what exactly does that mean?

These terms are used to describe the state of the market, which is determined by some technical indicators. These indicators are called oscillators, as two popular examples are Stochastics and RSI. An oscillator is often used as inertial indicator that measures the current price of a currency pair in comparison with its historical price within a specified period of time.

Scale for both indicators is 0 to 100. When Stochastics reaches level 80, the market is considered to be over together, and when Stochastics reaches level 20, the market is considered oversold. RSI uses the same scale of 0 to 100, but the value for the heap is over 70, while the value of over sold market has 30. The idea is that when the market reaches either extreme, the ability to change direction increases.
However, this does not mean imminent reversal. Markets that are in strong uptrend can remain in one place for over long periods of time, and markets that are in strong downtrend can remain oversold for long periods of time. Therefore, these oscillators have somewhat limited value in trend markets.

However, when the market is in downtrend and the oscillator moves to over together, has a much better chance of reversal. Conversely, when the market is uptrend and the oscillator moves down to over sold market, also have a greater chance of a turnaround.

Also, when Stochastics moves up one place to hype condition the market tends to twist and move back in the direction of the trend. This is one way in which traders use this tool to identify trading opportunities. The key here is that the market is in downtrend, and as such, we will look for sell signals from Slow Stochastics. This signal will be moved downwardly from the indicator 80.

If the market is in an uptrend, the opposite would be true, and we treated the movement down to oversold as an opportunity for purchases when Stochastics is back above 20.
So while oscillators can be particularly useful for identifying trade opportunities, the direction of the trend and trade in this direction are what increases the reliability of these resources.