What Is Overbought?
Overbought describes a condition where an asset has risen quickly and significantly relative to historical norms, suggesting a pullback or consolidation may be due. The most common overbought indicator is RSI above 70, though Stochastic above 80 and extreme Bollinger Band extensions also signal overbought conditions.
How Overbought Works
Overbought doesn't mean price will immediately reverse — in strong trends, an asset can remain overbought for extended periods while price continues higher. This is especially true in crypto, where parabolic rallies can keep RSI above 70 for weeks. Overbought is a warning signal, not a sell signal on its own.
Why It Matters for Traders
The actionable use of overbought readings depends on the market regime. In a range-bound market, overbought RSI is a reliable sell/short signal. In a strong uptrend, overbought means the trend is strong and pullbacks to "not overbought" are buying opportunities. The distinction between these two applications is what separates novice from experienced traders.
