Overbought and oversold levels in trading

[echo13]

Hi guys. Overbought is defined as "a situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals."

Sometimes in short-term trading (eg. scalping),can price movements be created out of pure speculation? If so,how is that asset determined as overbought, when the 'fundamentals' in this case is just pure, subjective speculation?

 

[DashRiprock]

its overbought when its gone up but no one is doing any trading on/near the highs
its oversold when its gone down but no one is doing any trading on/near the lows

 

[forker]

Higher lows or lower highs

 

[kimo'sabby]

I thought that OS and OB levels were areas where mugs try to pick tops and bottoms and get bummed for thier efforts.

 

[new_trader]

Hi guys. Overbought is defined as "a situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals."

Sometimes in short-term trading (eg. scalping),can price movements be created out of pure speculation? If so,how is that asset determined as overbought, when the 'fundamentals' in this case is just pure, subjective speculation?

Fundamentals are not really considered speculation. They are the actual 'facts' of a company as it stands and they are easily obtained from the annual or interim accounts. Nobody speculates on the Total Current Assets or Cash flow or Total Operating Expense of a company because these things must be reported.

Speculation arises from a traders/investors opinion about whether the current stock price represents good value and each trader/investor will usually have a way of valuing it using their own 'rules' or ratio's derived from the accounts.

As far as short-term trading, it would be safe to divide traders into two major groups:

1) The public
2) The smart money, strong hands, insiders

Simply put, a stock/asset is overbought when the public is doing most/all of the buying and a stock/asset is oversold when the public is doing most/all of the selling.

 

[lewtz]

Simply put, a stock/asset is overbought when the public is doing most/all of the buying and a stock/asset is oversold when the public is doing most/all of the selling.

This is exactly how I'd define it. When dumb money is jumping in, time to get out. This extends well beyond intra-day trading as well.

 

[echo13]

When dumb money is jumping in, time to get out.

Could you please explain why and how dumb money entering a market may be a bad thing?

 

[Bint_Crusher]

I thought that OS and OB levels were areas where mugs try to pick tops and bottoms and get bummed for thier efforts.

If yer an expert with stochastics then you can sell yer strategy at an expo. Alternatively just learn to read the feckin chart.