The Overbought Trap

This lesson exists because the single most expensive mistake with momentumBuying recent winners and avoiding recent losers. indicators is so common: shortingSelling borrowed shares hoping to buy them back cheaper. “overboughtA condition suggesting price has risen too far, too fast.” and buying “oversoldA condition suggesting price has fallen too far, too fast.” mechanically, ignoring the trendThe prevailing direction of price: up, down or sideways.. It feels logical — and it bleeds accounts in trendingThe prevailing direction of price: up, down or sideways. markets.

• In a range — overboughtA condition suggesting price has risen too far, too fast./oversoldA condition suggesting price has fallen too far, too fast. work well; price oscillates between the extremes, so fading them is reasonable.
• In a *strong trendThe prevailing direction of price: up, down or sideways.* — they fail; the indicator stays pinned at an extreme while price runs. Use momentumBuying recent winners and avoiding recent losers. for *divergenceWhen price and a momentum indicator disagree — an early warning. and pullback entries with* the trendThe prevailing direction of price: up, down or sideways., not for counter-trend reversals.
• Always check trendThe prevailing direction of price: up, down or sideways. context first (e.g. with ADX or price structure) before trusting an overboughtA condition suggesting price has risen too far, too fast./oversoldA condition suggesting price has fallen too far, too fast. signal.