What the Forex Term "Overbought" Means

Forex trading uses trading jargon that we have to understand if we want to participate in it productively. Forex terms, like "overbought," have significance in our successful trading and should be carefully looked into with diligence.

What's overbought in forex? It is where we find ourselves in a situation where our assets create demands. It's an almost good trading scenario except that this forex term involves an undue increase in the price of a primary or basic asset. The increase sometimes gets to unprecedented levels that they ruin the rudiments of forex trading.

Thus, when a secondary asset derived from a primary asset suddenly gathers a demand, its natural result is to gain price. But the negative effect is that the primary asset source sometimes also tends to increase in price to a level more than is allowed. When this happens the asset is said to be, as the forex term calls it, overbought.

Technically speaking, this forex term depicts a scenario where the value of a high-volume security has increased to an unstable level. It has skyrocketed to the extent that oscillators also peak their higher limits. Generally, this means that the value of an asset is being overestimated or overvalued. This may lead to a pullback.

For instance, a situation for this forex term is if we see an asset suddenly shoot up price or do abrupt increasing trends in just a short period, chances are, it is being overbought. Being overbought is a sure forex market indicator. But as to how much an asset is being overvalued depends on the type of investor we have.

Forex experts determine assets about to or are being overbought through the use of certain forex indicators. Thus, the forex term "overbought" is gauged through the use of an index that measures the relative strength of an asset. It is also monitored through stochastic oscillators or the index that checks money or currency flows.

These tools help forex experts recognize and categorize securities or assets that tend to be overbought. In contrast, securities that are not excessively priced or priced relatively low have the forex term, "oversold" securities.

A "pullback," another forex term, on the other hand is the equivalent of diminishing returns in economics. After being overbought due to its high gains, an asset or security tends to freeze its gaining momentum. This signals its downward trend from then on.

These are forex terms we need to consider seriously. Overbought or oversold assets should be closely monitored to balance the trade.