Overbought

Overbought is a term used in technical analysis to describe a condition where an asset is believed to be trading at a price higher than its intrinsic value due to excessive buying pressure. This condition is typically identified using technical indicators like the Relative Strength Index (RSI), where an RSI value above 70 is often considered a sign that an asset may be overbought. When an asset is overbought, it suggests that the price may be due for a correction or pullback, as the buying momentum might be unsustainable in the short term.

Traders use the concept of overbought conditions to make informed decisions about their entry and exit points in the market. For instance, if a trader observes that an asset has been in an overbought state for an extended period, they might consider selling or shorting the asset in anticipation of a price drop. Conversely, traders may avoid buying into an overbought market to prevent entering at a peak price, reducing the risk of potential losses when the price corrects. Overbought signals can also prompt traders to set tighter stop-loss orders to protect profits in case of a market reversal.