Overbought
Overbought describes a condition where price has risen too far too fast, and a pullback or reversal is likely. It's often signaled when RSI goes above 70.
Understanding the Concept
Getting overbought doesn't mean price has to crash immediately. During strong trends, assets can stay overbought for weeks. But it does mean risk is elevated. You're buying after the move, not before it. This is where most retail gets destroyed—they see a coin up 50% in a week and think it's going to 100%. Sometimes it does, but often it pulls back first. Use overbought readings as a warning to tighten stops, take profits, or wait for a better entry. Don't short just because something's overbought. In bull markets, overbought assets can get more overbought. You need confirmation.
Real-World Example
DOGE pumps from $0.08 to $0.15 in three days. RSI hits 88. You're tempted to buy but recognize it's overbought. Two days later it's back at $0.11. Patience saved you from catching a falling knife.
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