Oversold (forex oversold).
Supply and demand always actively influence pricing in any market. The greater the supply of similar goods, the lower the price of a given asset. Conversely, with increased demand and limited supply, the price only rises. In forex, this aspect should be considered in relation to existing contracts, so the basic concepts here are oversold and overbought.
Oversold (forex oversold) – a predominance of currency short contracts, which leads to a halt in price decline, as the currency pair's value ceases to fall. In this situation, a reversal of the downtrend becomes more likely.
This term is used in relation to the base currency in a currency pair; essentially, it's the bottom of the so-called minimum for a given time period. Such moments can be identified using a forex oscillator or by visually analyzing the market situation.
If we consider forex oversold conditions using a specific example, we can observe the following situation.
After an increase in euro supply, the market responded with a downward trend, and the price of the EURJPY currency pair declined. This event led to the exchange rate falling to a minimum at which there are practically no sellers willing to sell the euro. The market entered an oversold state. This phenomenon can be caused by a strong level derived from historical data for past time periods or some other factor.
The price at this point is quite attractive, which prompts traders to open sell positions, thereby increasing demand and driving up the price. The trend initially slows, then reverses and transitions to an upward trend. This continues until the market enters an overbought forex .
The Stochastic Oscillator allows you to monitor the market situation and identify oversold conditions early. This tool offers extremely flexible settings. Using these settings, you can set the initial oversold limit at 10 or 20. Crossing this limit upward is considered a buy signal.
Oversold Forex is often used when trading on a reversal, and it is advisable to use price channels stochastic
