Overextended Markets (Overbought And Oversold)1) Bollinger Bands:
Some traders will determine the market as "over-extended"
when the price is piercing above or below the Bollinger bands.
If above then the price is considered overbought and price may start to reverse.
If below then the price is considered oversold and the price may start to reverse.
2) Stochastic RSI:
some traders will determine the market as "over-extended" once the price is over the 70% line or below the 30% line.
The bottom 30% means the price might be oversold and buyers are projected to come in.
When the price is above the 70% line the market is considered overbought and sellers are projected to come in.
3) Supply And demand
When we have 3x continuation patterns in a row DBD or RBR in a row, we can draw a downward or upward aggressive trend line (momentum line).
When this happens, we consider the market overextended and call it the “elastic band effect”.
stretch out an elastic band to the breaking point and let go, the elastic band snaps back at a high-speed force and hurts.
This is the same for trading, When the market is overextended and breaks the downward or upward momentum line, we can assume the market will snap back and remove 2 if not 3 of the opposing zones that gave us the ability to draw the aggressive momentum line.
Buying or selling the pullback into the demand or supply is usually a good call if the criteria are met for a good trade.
