Understanding overbought and oversold technical signals
Overbought and oversold conditions are mathematical measures of momentum, not automatic indicators of an impending trend reversal.
The argument
The guest explained that an overbought condition (defined as a stochastic oscillator reading above 80%) is a normal function of a strong breakout. A true sell signal only occurs when the indicator ticks downward and rolls back below the 80% threshold, and this can be resolved through sideways consolidation rather than a price decline.
Hear it yourself
"So it's a normal function of a breakout or positive momentum. But when you get that downtick and the stochastic oscillator for us rolls back below 80%, that's where you have a so called overbought sell signal, and that's when you wanna, take action, right, in terms of risk management."
00:00 / 00:18