The interpretation of the indicator is simple. The indicator shows the period when the market move could be exhausted, or is nearing its end. Thanks to this, we can trade more accurately, execute well-timed trades, and make higher profits.
Overbought means a period where there has been a significant and consistent upward move in price without much pullback.
On the other hand - oversold describes a period where there has been a significant and consistent downward move in price without much pullback.
The market is considered overbought when the indicator rises above the 70 level. Sell signal can be generated.
The market is considered oversold when the indicator falls below the 30 level. Buy signal can be generated.
Based on our experience, currency pairs are traded like the bowls of scales (currencies are compared to each other). That is why there is an expectancy for the currency pairs to make pullback moves. Also, the price cannot move in one direction forever. Currency pairs that are overbought or oversold have a greater chance of reversing direction, but could remain overbought or oversold for a long period.
There are two ways how to trade with the indicator:
A) Take the SELL signal when the indicator falls below 70 level or take the BUY signal when the indicator rises above 30 level. The best method here is to watch the whole context of the price moves and Price Action. If you feel and see that the market is reversing, it is the right time to trade! B) Close your BUY trades as soon as the line of the indicator becomes red and close your SELL trades as soon as the line of the indicator becomes green.
The latest Overbought / Oversold indicator version 3.01
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