Introduction to overbought and oversold
Oversold and oversold are important concepts in technical analysis, which are used to judge whether the market price deviates from its reasonable value and thus predict the price trend. When the market price is overbought, it means that the market sentiment is too optimistic and the price may fall. When the market price falls excessively, it means that the market sentiment is too pessimistic and the price may rebound.
Second, overbought indicators
The overbought index is an index used to measure whether the market price exceeds its reasonable value. Commonly used overbought indicators include relative strength indicator (RSI), stochastic indicator (KD indicator) and rate of change indicator (ROC).
1. Relative strength index
Relative Strength Index (RSI) is a classic overbought and oversold index, which is used to measure the strength and speed of market prices. The calculation formula of RSI is: RSI =100-(100/(1+RS)), where RS stands for relative strength and RS= (sum of average rising closing prices/sum of average falling closing prices). When RSI exceeds 70, the market is considered overbought and the price may fall.
2. Random indicator (KD indicator)
Stochastic indicator (KD indicator) is a common indicator of overbought and oversold, which is used to measure the market price. The calculation formula of KD index is: K= (today's closing price-lowest price)/(highest price-lowest price) * 100, and D = K's 3-day simple moving average. When the k value exceeds 80, it is considered that the market is overbought and the price may fall.
3. Change rate index
The rate of change indicator (ROC) is an indicator to measure the changing speed of the market price, and it is used to judge whether the market is overbought. The calculation formula of ROC is: ROC= (closing price today-closing price before N)/closing price before N * 100. When ROC exceeds 10%, it is considered that the market is overbought and the price may fall.
Third, oversold indicators.
Oversold index is an index used to measure whether the market price is lower than its reasonable value. Commonly used oversold indicators are relative strength indicator (RSI), stochastic indicator (KD indicator) and William indicator (W%R).
1. Relative strength index
The relative strength index (RSI) is introduced into the overbought index. When RSI is lower than 30, it is considered that the market is oversold and the price may rebound.
2. Random indicator (KD indicator)
Stochastic index (KD index) has been introduced into overbought index. When the k value is lower than 20, it is considered that the market is oversold and the price may rebound.
3. William indicator (W%R)
William indicator (W%R) is an indicator to measure the overbought and oversold market prices, and its calculation formula is: W%R= (highest price-today's closing price)/(highest price-lowest price) * 100. When W%R is lower than 20, it is considered that the market is oversold and the price may rebound.
Fourthly, how to apply overbought and oversold indicators?
Oversold and oversold indicators can be applied to market analysis and trading decisions. When the market is overbought, you can consider selling or holding money. When the market is oversold, you can consider buying on dips or opening positions.
It should be noted that it is unreliable to rely solely on overbought and oversold indicators for trading, and it needs to be comprehensively analyzed in combination with other technical indicators and market trends. At the same time, the overbought and oversold indicators are also time-sensitive, and the parameters need to be adjusted and verified in time.
To sum up, overbought and oversold indicators are commonly used in technical analysis to judge whether the market price exceeds or falls below its reasonable value. Reasonable use of these indicators can improve the accuracy and profit probability of transactions. The overbought and oversold indicators are not omnipotent, so it is necessary to comprehensively analyze other indicators and market trends to improve the success rate of transactions. At the same time, traders also need to have good risk management ability to avoid making wrong decisions because of over-reliance on overbought and oversold indicators.