"Oversold" is when the pricing of a security or the market is too low. Although this phrase is derived from stock prices in traditional exchanges, it is widely used in the cryptocurrency world.
In order to make an " #Oversold" diagnosis, it is necessary to look at the values of certain indicators. Based on these indicators, it can be understood that the asset is related to its fair price and whether it is oversold or not. In this article, I will discuss the concept of "oversold", which I often encounter in technical analysis, and the points that this concept is decisive for.
Before moving on to indicators and formations, it is necessary to open up the concept of "oversold" a little more. There are many reasons why a cryptocurrency or stock has been oversold. For this reason, technical analysts interpret the pricing progress below its fair value in two ways. Although these are the right approaches in their own lane, they can be considered as points that evaluate the situation from different perspectives.
"If there is blood on the streets, it is time to buy it." - Baron Rothschild
Contents 👇
↘️1 Basic oversold
↘️2 Technical oversold
↘️2.1 What is RSI and how is it used to detect 'oversold'?
↘️2.2 What are Bollinger Bands and how are they used to detect 'oversold'?
↘️3 Conclusion
Basic oversold
The fact that the asset traded in the stock exchange is below its real value can be evaluated by considering the fundamental analysis. While this comment is made, the effect of the news about the project or the company is quite high. For example; Experiencing negative developments regarding an altcoin will affect the pricing downside and cause the coin to oversold. Parallel to this, the loss of confidence and the trend followed by the market also fundamentally help us diagnose "oversold".
Basically, an indicator called “P / E ratio” helps us. The exact equivalent of this indicator is the price-earnings ratio. The price-earning ratio, ie P / E ratio, has a wide range of uses, from the writing of financial reports to the preparation of technical documents. If the price-earnings ratio drops below the average, it can be understood that our altcoin is lower than the price it deserves. Parallel to this, purchasing opportunities arise.
The price-earning ratio is an advanced indicator in the traditional stock market, but it is possible to adapt to the crypto world.
P / E = stock price / earnings per share
If we consider that #cryptocurrencies are #blockchain companies, it will be extremely easy for us to adapt the terms coming from the traditional #financial world. #Crypto versions of the formula for the price-earnings ratio we have given above are also available.
For example; P / E = Market value ( number of tokens x current price) / total earnings for crypto
The low price-to-earnings ratio basically signals us that altcoin constitutes a buying opportunity. On the other hand, the high price earning rate tells us that the coin is trading above its deserved value.
🚨Technical oversold
#Technical #oversold, a perspective often used by analysts and traders, only looks at the historical data of pricing. In order for an asset to be traded below its technically fair value, it must correspond to the specified values in the indices. While technically diagnosing oversold, fundamental analysis is not mentioned.
To be able to look at it from this perspective, we need to be able to understand two important indicators and what these indicators mean.
🚨What is RSI and how is it used to detect 'oversold'?
The #RSI value, known as the #Relative #Strength #Index, is one of the most important indicators that help us determine whether assets are below their fair value. While two-week intervals are based on traditional exchanges, the time interval evaluated may vary in the crypto world.
Our indicator must be below 30 before we can speak of a low RSI value. Thus, a technical diagnosis of oversold can be made. However, it would be extremely wrong to determine that all cryptocurrencies with an RSI value below 30 are below their fair value. The RSI is a benchmark indicator only and gives an opinion to the analyst. RSI can stay below 30 for a long time. Therefore, it would be more rational to wait for favorable conditions for the bullish sign to occur.
🚨Bitcoin Daily RSI
What is the Bitcoin Daily RSI / Oversold?
The limits marked with dashed lines on the daily BTC chart above are the lower and upper RSI values based on. In line with what we mentioned in the previous paragraph, I have marked places where our Bitcoin Relative Strength Index indicator is below 30. The first marked area is the bottom points of the previous bull market. The second marked part is the correction that took place in 2019 and the third part can be evaluated as the pandemic crisis. The common feature of these points is that Bitcoin is technically indicative of the time periods in which it can be diagnosed as "oversold".
🚨What are Bollinger Bands and how are they used to detect 'oversold'?
It is used to determine whether the pricing is of fair value from a technical point of view. It was found by the #American #analyst #John #Bollinger. While calculating the value of #Bollinger #Bands, the twenty-day average and standard deviation of the price is used. There are three bands in total and they are divided into low, medium and high bands. If the current price is moving close to the low band, the way to detect "oversold" is opened. However, as with the RSI value, this indicator is used to give an idea. It would be better to wait for prices to move upwards and observe the price interaction with the Bollinger Bands.
🧐Result🧐
In this article, I tried to evaluate the meaning of the concept of "oversold" from a technical and basic point of view. Determining whether the assets are of fair value helps the investor to make more rational decisions. Although the decisive effect of the indicators is quite great, all possibilities should be considered when making a decision. Watching the indicators and trying to understand the points they point to makes it very easy for us to detect "oversold". It is not certain that any asset below its fair price will rise sharply, and assets above its fair price will also experience a sudden decline.
References
👇👇👇
https://coinmarketcap.com/alexandria/glossary/oversold
https://www.investopedia.com/terms/o/oversold.asp
https://medium.com/the-capital/what-is-oversold-3abea2059cc7
https://academy.binance.com/en/articles/5-essential-indicators-used-in-technical-analysis
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