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As a trader, being able to identify overbought and oversold conditions in a market can help you decide when to enter and exit a trade, what position to take, and when a trend reversal may be imminent. This insight allows you to manage risk and make more informed trading decisions.

The most common indicators used to identify overbought and oversold conditions are the Relative Strength Index (RSI) and the Stochastic Oscillator. Both tools are momentum indicators and are plotted on a separate chart adjacent to the price action chart. They are also banded oscillators and, therefore, have a specific graphic range between 0-100. Overbought and oversold readings define the upper and lower bands, or extremes, of that range.