Oversold – what is it?

An asset in an oversold condition is the direct opposite of being overbought.

When an asset is oversold, its price reaches a minimum, and the activity of sellers starts to decline, while potential buyers pay more attention to it.

This means that the best time to buy the asset has either already arrived or is approaching. However, it is important to remember that during strong trending movements, an instrument can remain in an oversold (or overbought, in the case of an upward trend) condition for quite a while without any consequences.

A common mistake made by beginners is buying an instrument as soon as it enters the oversold zone and then selling it when they realize it continues to fall. The bottom often turns out to be false, and the market surprises with a second gift. Therefore, it is not advisable to catch falling knives; it is a task for experienced traders (and even many of them avoid doing so). It is better to wait until a reversal becomes evident or even until new support levels are tested.

Nevertheless, oversold conditions are still important - in combination with other indicators, they indicate that it is time to buy. However, caution should be exercised, and oversold conditions should not be seen as a guarantee that the instrument will grow from current levels. It is merely a promise of future growth if everything goes well.