Oversold price means a price too low, that jumps shortly after. For a number of reasons, lets say profit taking or fear, there will be extended periods of time, during which investors are selling their shares. This increased selling activity drives the prices lower. All those investors, getting rid of their shares flood the market with supply. The asset becomes now available from many sellers and this is why it becomes less valuable. At some point the price will become too cheap, which makes it “oversold”.
Those new and low prices make the stock attractive again, because new buyers would enter the market with the idea to buy low and sell high after. Usually you will find an oversold market either at the bottom of a down trend, or at the bottom of a downward correction in an otherwise upward trend. The early discovery of oversold assets can be a profitable strategy, as usually assets tend to rise after they became oversold.
Detecting “oversold” markets is normally done with the help of technical indicators of a special type – oscillators. The chart of the indicator will oscillate between a high and a low point, showing overbought at the top and oversold at the bottom. Those indicators will not show you the direction of the trend, but only the two extremes of the prices – either oversold or overbought. Our favourite such indicators are the Relative Strength Index (RSI) , Commodity Channel Index (CCI) and Williams Percent Range (%R). In order to get clearer signals for a buy or sell order, its better if traders combine the oscillators with a trend following indicator such as Alligator, Bollinger Bands or Moving Average.
