Overbought & Oversold: Signals for Crypto Traders

Crypto market might seem complicated for those who have never dealt with trading before. However, as any skill, it can be leveled up pretty fast. Have you ever heard of the overbought and oversold signals? If not, then don’t miss our today’s guide to trading theory — we’ll discuss the most essential things — what are these two signals, how to detect and use them for your own benefit. 

First let’s deal with the base and understand what crypto trading signals are. Jump in and we’ll start!

Trading signals explained

Cryptocurrency trading signals are indications delivered to crypto traders that suggest purchasing, selling or holding a specific asset. Such signals are usually produced by automated algorithms or manual analysis of market data by professional traders, and then disseminated to subscribers via communication channels (Telegram, Discord, email etc).

Trading signals serve as a guide for those who want to make informed trading decisions. By using these signals, one can try to avoid the risks connected with impulsive actions and lean on more reliable info to make successful trades. Furthermore, trading signals are not only helpful for beginners but also for veteran traders who might not have the time to monitor the crypto market constantly.

We have to mention that not all crypto trading signals are created equal. Some of them could be formed by unverified sources or inexperienced traders, leading to unreliable or even misleading advice. Therefore, it’s crucial to do thorough research before subscribing to any signal service. It’s better to only count on signals from trustworthy sources with a confirmed track record of success. However, they should be checked too. Don’t forget to do your own research. 

Overall, crypto trading signals can become a helpful instrument when used correctly. It might come in handy for traders looking to navigate the often-volatile world of crypto. It’s important to utilize them judiciously and coupled with one's own market research and analysis to make informed trading decisions.

Overbought & oversold

The RSI (Relative Strength Index) is used for an indication of the strength of the cost. It shows how fast the price of crypto switches in a certain time frame. RSI aids to determine whether the market is overbought or oversold, showing when costs may start to change their course. The RSI is depicted in the form of linear graphics and a scale from 0 to 100 and is often used along with other signals and analysis methods to make trading decisions.

Levels of overbought and oversold arise following the market price changes. If prices increase significantly in a short time frame, the RSI indicator will show a high rate (>70), which means overbought. In this case, there is a possibility that prices will start to decline soon, and traders may think of selling the asset.

On the other side, if prices fall significantly in a short period of time, the indicator will show a low rate (<30), which means oversold. As it happens, there is a possibility that prices will start to rise soon, and traders may consider buying an asset.

The use of overbought and oversold levels can facilitate everyone who trades crypto to make more informed decisions. Everybody who deals with trading should understand that overbought or oversold doesn’t always mean that the market will start crawling in the opposite direction, so the RSI indicator should be used with caution and in conjunction with other instruments.

If you noticed the overbought signal, it could be a signal to sell or to reduce the share of purchases. On the other hand, if you notice the oversold signal, it can be a signal to buy, or increase the share of purchases when their price is lower.

Use indicators to confirm overbought or oversold. Other indicators, such as moving averages, moving average convergence divergence indicator (MACD) or stochastic oscillator, can be used to obtain additional confirmation signals.

Conclusion

Always consider the current trend direction. If prices move in one direction, there’s no need to close a position too early, just because RSI has reached the level of overbought or oversold. Instead, follow the trend and wait for other signals indicating a change in the direction of price movements.

If you are interested in this topic and want to learn more, make sure to read our previous articles telling about triple top patterns, different crypto trading strategies and the ways to determine the bear and bull traps. 

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.