Defining Overbought
The term ‘overbought’ refers to a situation where a cryptocurrency‘s price escalates over a period due to persistent investments, despite lacking a supportive investment rationale.
Generally, an overbought condition is followed by a period of selling.
In essence, a crypto asset is considered to be overbought when it’s perceived to be trading at a value higher than its fair price.
Insights from Technical and Fundamental Analysis
The duration of this occurrence can be brief or prolonged, and the price may plummet if the situation reverses.
Within the digital currency ecosystem, tools like technical analysis are often utilized to ascertain if an asset is overbought and predict when a trend reversal is likely to occur.
Similarly, fundamental analysis, which involves assessing publicly available information related to industry-specific and macroeconomic factors, can be used to identify an overbought condition.
Moreover, it aids in forecasting when a cryptocurrency will cease its unsupported price surge.
Overbought levels can be measured using technical tools that consider factors such as trading volume, recent prices, and trading momentum.
Employing Technical Indicators
The stochastic indicator identifies an overbought condition by comparing the current asset price with its highest and lowest prices over a specified period.
On a scale from 0 to 100, a rating of 80 indicates an overvalued asset.