Understanding the Term “Oversold”
“Oversold” is a term used when an asset, like Bitcoin, is believed to be trading at a price lower than its intrinsic value.
It’s the counterpart of “overbought.” The determination of whether an asset has entered an oversold territory is subjective since different analysts use various analytical tools.
Understanding Oversold Conditions
The duration of an oversold condition doesn’t have a predetermined time limit.
However, technical indicators are used to gauge the oversold status of a cryptocurrency asset.
These indicators also provide estimates on when this state is likely to reverse.
Often, the reversal date is based on certain “if” conditions.
For instance, analysts may speculate that a shift will occur only if a certain price level, commonly referred to as a support level, is attained.
Identifying Oversold Conditions
Frequently used technical indicators to detect an oversold condition include the relative strength index (RSI) and Bollinger bands.
The RSI indicator utilizes a momentum oscillator to measure the speed and change of price movements.
Meanwhile, Bollinger bands are composed of a lower, middle, and upper band.
Interpreting Price Deviations
The middle band is based on an asset’s moving average, while the lower and upper bands reflect standard price deviations relative to the middle band. An oversold condition typically emerges when the values move towards the lower band.
In addition to technical indicators, an oversold state can also be identified through fundamental analysis, which depends on current and historical prices.