Risen fast and risen far:overbought says the pace is above par.
A label for a market whose price has risen quickly and far by the measure of an indicator; an RSI reading above 70 is conventionally called overbought.
It describes recent movement and does not mean that a fall is due: in a strong trend an indicator can stay overbought for a long time.
In plain words
Overbought is a label chart readers give to a market that has risen quickly and far by the measure of an indicator. With the relative strength index, or RSI, which runs from 0 to 100, a reading above 70 is conventionally called overbought.
See it move
In the upper zone: Overbought
Why it matters
The label is used as a note of caution that a rise has been unusually fast and may pause or pull back. It describes recent movement, and in a strong trend an indicator can stay in the overbought zone for a long time while the price keeps climbing.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
RSI compares the average gain with the average loss over a set number of periods, commonly 14; here the average gain is 3 and the average loss is 1.
- 1Ratio of gain to loss3 ÷ 1 = 3
- 2RSI = 100 − 100 ÷ (1 + 3)
- 3100 ÷ 4 = 25, so RSI = 100 − 25 = 75
A reading of 75 is above 70, so by convention the market is called overbought.
A common mistake
Overbought does not mean that the price is too high or that a fall is due. It says that recent gains have been large relative to recent losses, and nothing about what comes next.
Check yourself
Learn more
- Academy lessonRSI and MACDHow the Relative Strength Index and MACD are constructed, what overbought, oversold, divergence and crossovers mean, and where signals mislead.
- Academy lessonBollinger BandsHow Bollinger Bands are built from a moving average and standard deviation, what band width says about volatility, and how squeezes are read.
Educational information, not investment advice or a recommendation to trade.