Overbought and Oversold Zones........Share your knowledge guys.

Generally indicators are defined as look for a buy signal in OVERSOLD zone and look for a sell signal in OVERBOUGHT zone but it is not as simple as that cos nearly 65% of the trade done only on this condition fail and endup in hitting stoploss......So how should the OVERBOUGHT and OVERSOLD conditions should be understood.

What I observed is that stock gets more bullish and aggressive when the indicator (lets suppose RSI) enters into OVERBOUGHT lever (in this case 70 level) and becomes bearish when it enters into OVERSOLD level (in this case 30).............this is where a normal retail trader makes mistake actually looking for a reversal signal when the trend is strong......Simple point NEVER SELL WHEN INDICATOR IS RISING AND NEVER BUY WHEN INDICATOR IS FALLING.

This is just one of the many points that a technical trader should know.........


Experts please share your knowledge about actually understanding the Overbought and Oversold zones.Your knowledge could help many beginners and many such traders who have been making loose despite knowing the technicals.

Dear Praveen,

Indicators like RSI are defined as oscillator, as it is confined to movement between 0-100, so reading an oscillator in the sense of overbought(sell) and oversold(Buy) is definately a way to a disaster.
RSI(14) rising merely indicates cumulative gains of UP closes rising than cumulative closes of down closing over previous 14 trading days.
Similarly stochastics Rising means it is giving recent closing near to highs, so it is not like that closing near to highs is always bullish, what is all the bars on which stochastics rising are long lower shadow black body candles, is it bullishness...not so in long term sense, it may rise on short term...
So point is you need to understand price at first, then go for addons.
But people run stock scanning search focusing on add0ons and failed to see what price is telling...
Another thing is why oversold/overbought region at 80/20, 70/30..etc...people come up with justification we need to see where historical lows are coming in and those are perfect levels. I am not an advocating issue of dont use indicators, but in first place understand what price is doing...trendlines/moving averages too can be usable, as it is ultimately price action points.
So analyst really come out of mindset of indicator based trading, understand price and then one can refer what those indicators are telling...

Remember, while driving on a road, traffic police have indications alongside the road as 'Drive slowly' turn ahead, that means turn is coming in adjust you speed level(trading positions), and be on cautious path.
I am not a perfect trader, i do commit mistakes, but point is how much bigger/smaller your mistakes are...

So gist is 'Bhav bhagwan che'