Overbought Definition. Overbought is a term describing a condition in which the price of a security, commodity or currency has increased significantly in a short period of time such that selling pressure will gain the upper hand and cause an immediate decline in the price level achieved. It is often said that the position is not justified by fundamental or technical analysis. Simply stated, the price has risen too far too quickly, and a pullback is imminent. The term can be applied on an objective or qualitative basis, or it can be determined from technical analysis using specific indicators that have been designed to signal this condition. A forex trader often uses indicators from the oscillator family for this purpose. The favorites in this area are generally the Slow Stochastic Oscillator and Relative Strength Index (RSI). Forex traders often use a Moving Averages Convergence-Divergence (MACD) indicator to confirm that a change in an overbought condition is imminent, as forecasted by either of the two other leading indicators. The opposite condition is referred to as Oversold.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.