Forex trading can be very profitable if you know how to build strategies and work with indicators correctly. However, sometimes, there are situations of overbought and oversold, when the price movement largely exceeds or, vice versa, lowers the usual threshold value. This phenomenon may be the result of many events of a political or socio-economic nature. Shortly after such an overbought or oversold condition, the price movement reverses direction.
The Importance of Technical Analysis in an Overbought and Oversold Situation
Professional Forex traders easily distinguish between such conditions with the help of special indicators that help them increase profits by pointing to convenient entry points into the deals. For overbought and oversold conditions, the two most popular indicators are used:
- RSI (relative strength index) evaluates the sustainability of current price trends.
- A stochastic oscillator allows comparing different periods to define the normality of deviation of the current price level.
Use MetaTrader 5 download to take advantage of these and numerous other indicators that will point you to normal and abnormal price movements.
Novice traders often learn technical analysis not before they start trading but in the process of doing so. Therefore, in an overbought or oversold situation, without predicting the imminent trend reversal, they can suffer serious losses. To prevent this from happening, it is important to be able to use the stop-loss order function.
How a Stop-loss Order Saves Your Assets
- A stop-loss order is your reliable assistant when trading on Forex as it gives an order to close an open trading position if quotes start to move in a direction that is unfavorable for your assets.
- In this case, even if you incur a loss, it will be insignificant.
- In addition, you can set the size of this loss, which means that it will be within the limits of your expected losses.
Weak Sides of Stop-loss orders
With a stop-loss order, you automatically close an unprofitable trading position. But in the Forex market, there are short-term fluctuations in exchange rates. And this means that soon, the price movement may go in a new direction beneficial for you. Since the trading position is already closed, you will not be able to make a potential profit. Therefore, the downside of insuring you against losses is lost profits.
So as not to be mistaken in situations of overbought and oversold and not to open a deal when the price movement is ready to turn in an unfavorable direction for you, study technical analysis. Proper work with indicators will help you increase profits and avoid serious losses. Until you master them, insure yourself with stop-loss orders and, feeling safe, move on!