Overbought/ Oversold indicators show the current trend of the stock cannot be sustained for further. That means that they signal either excessive buying of the stock, or excessive selling of the stock. Thus, they are indicators that signal reversal of the current trend of the stock.
The indicators can be helpful, but there is ongoing discussion as to whether all traders/ investors may find these characteristics useful for buying/ selling the stock. The reason behind the questioning of the overbought/ oversold indicators is that overbought, or oversold states, may not show that there is a reversal of the trend being imminent, but that there may be stronger conditions for the stock to advance even further in the current direction. Therefore, there is a clash of opinions whether these indicators are useful, or not.
Advanced stock traders, may warn that for inexperienced traders, they should shy away from consulting such indicators because of the difficulty in determining if they signal reversal of the current trend, or a push further, i.e. to higher values in the case of overbought, or lower values in the case of oversold.
AS a conclusion, we might say that it takes experience to determine what the stock may be doing next and that novice traders/ investors should probably not work with these indicators, or at least confirm the direction of the stock with more professional traders, so that they have at least a second opinion on the movement of the stock.
Actually overbought/ oversold states can be formed by many popular indicators like the ROC (Rate of Change). The ROC determines the speed of the stock, thus if the stock shows high speed in the direction of the current trend, may mean obvioulsy overbought traits, since this is what drives the stock further, or increases its speed. The same on the down trend, if the stock is showing a high speed of losing value, it may not necessarily mean that it will change direction shortly but may mean that the stock is going to go even further lower.
Therefore, as a conclusion we may say, that following these indicators without proper experience, may result in cutting winnings short and may allow the losses to run further.Therefore, in overall, it is imperative, or suggested/ recommended that such indicators, not be taken at face value, but to be used only as filters in filtering out any decisions that are taken by more appropriate indicators.
The indicators can be helpful, but there is ongoing discussion as to whether all traders/ investors may find these characteristics useful for buying/ selling the stock. The reason behind the questioning of the overbought/ oversold indicators is that overbought, or oversold states, may not show that there is a reversal of the trend being imminent, but that there may be stronger conditions for the stock to advance even further in the current direction. Therefore, there is a clash of opinions whether these indicators are useful, or not.
Advanced stock traders, may warn that for inexperienced traders, they should shy away from consulting such indicators because of the difficulty in determining if they signal reversal of the current trend, or a push further, i.e. to higher values in the case of overbought, or lower values in the case of oversold.
AS a conclusion, we might say that it takes experience to determine what the stock may be doing next and that novice traders/ investors should probably not work with these indicators, or at least confirm the direction of the stock with more professional traders, so that they have at least a second opinion on the movement of the stock.
Actually overbought/ oversold states can be formed by many popular indicators like the ROC (Rate of Change). The ROC determines the speed of the stock, thus if the stock shows high speed in the direction of the current trend, may mean obvioulsy overbought traits, since this is what drives the stock further, or increases its speed. The same on the down trend, if the stock is showing a high speed of losing value, it may not necessarily mean that it will change direction shortly but may mean that the stock is going to go even further lower.
Therefore, as a conclusion we may say, that following these indicators without proper experience, may result in cutting winnings short and may allow the losses to run further.Therefore, in overall, it is imperative, or suggested/ recommended that such indicators, not be taken at face value, but to be used only as filters in filtering out any decisions that are taken by more appropriate indicators.
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