Overbought refers to a situation where the price of a cryptocurrency increases over time due to continuous investments, without any supporting investment rationale. Typically, when an asset is overbought, it is followed by a selling period. In simpler terms, a crypto asset is considered to be in the overbought region when it is believed to be trading above its fair value.
The duration of an overbought condition can vary, and if the phenomenon reverses, the price may experience a decline. In the digital currency ecosystem, technical analysis is one of the tools used to determine if an asset is overbought and when the trend is likely to reverse.
On the other hand, fundamental analysis involves evaluating publicly available information related to industry and macro-economic factors. This analysis can also help identify an overbought condition and predict when a cryptocurrency will stop its unsupported upward price increase.
Various technical tools are used to measure overbought levels, taking into account factors such as traded volume, recent price movements, and trading momentum. Some examples of technical formulas used to indicate an overbought level include the relative strength index (RSI), stochastic, and Williams %R.
The RSI considers the trading speed and price fluctuation, providing a value between 0 and 100. A value above 70 indicates an overbought signal.
The stochastic compares the current asset price with its highest and lowest price over a specific period. A rating of 80 on a scale of 0 to 100 suggests that the asset is overvalued.
Williams %R evaluates the current price in relation to the highest price over a given period. A value between 20 and 0 indicates an overbought level. For example, in February 2020, the RSI showed that Bitcoin reached overbought levels when it surpassed the $10,000 mark.
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