Overbalance indicators are a relatively undiscovered topic, so congratulations on reaching the Marianna Trench of trading. We will be your flashlight, and our affiliate program is the oxygen-filled life vest that will carry you up and into the light divine.
It gets a little technical here, but we’ve also attached a video on overbalance indicators below which you can explore independently if you’re a visual learner (if you’re a tactile learner, for now, unfortunately, we can’t help – for now).
You’ll find a growing number of topics here which will cover many areas that will surprise and delight you, especially if you’re into hardcore trading. Just in case, we have articles on related fields such as the RSI and Parabolic SARs if you want to learn more. We also definitely recommend learning more about risk in trading before you begin.
Formalities out of the way, what are overbalance indicators about?
The market is basically a range of fluid consensus on what the price of any crypto is over a period of time. We will (obviously) use Bitcoin as the easiest and probably the most promising market so far. So imagine you have a graph, and on it, a line is going up and down, which represents a price. In some schools of thought, it’s called the pulse – often-happening price swings going up and down. They can be of any rhythm, speed, and amplitude – just as long as they don’t stay at 0. For example, here’s a graph from Nominex.
Now, what makes price movements? Supply and demand, that’s what. There’s an average where there is a balance in all things. Crypto’s price is always hanging around a balance, and if there’s too much of an asset on the market the price starts going down. Just like with everything else – if something is rare, people want it and even create legends about it if it’s extremely rare and unknown. If it’s everywhere, they tend to lose interest. Unless it’s pizza. Everyone loves pizza.
Now, in the market, since there are patterns of how the price behaves which is based on human psychology, you can follow the pattern and figure out quickly when there’s too much of an asset in the market and when the price will soon go down.
When an asset reaches a certain point, the software that analyzes it comes to the conclusion that it was overbought, meaning everyone has too much of it. This means soon the price is going down (unless exciting news comes out or some type of events happens that makes the price jump or drop quickly) because people will start wanting to get rid of it.
Similarly, if an asset is oversold, it means people will want it because there’s not enough of it around. Now is a good time to buy.
For the sake of simplicity, for now, we’ll leave out the Chaikin oscillator, exponential averages, stochastic oscillators, and zero-knowledge proofs as well as the theory of nuclear synthesis and 8-dimensional chess and use the example of J. Welles Wilder Jr’s Relative Strength Index.
Designed specifically to identify where an asset was overbalanced, RSI is really easy to use, too. At Nominex, you can find it at the Indicator tab to the top and left of the graph, like so:
RSI is fantastically easy to use. Turn it on, wait for it to go down below 30, and buy so you can sell at a higher price (because under 30 the correction is likely coming). Higher lows mean a rising trend.
In this example, you can see how RSI keeps detecting where the market is going to bounce up after reaching the 30 marks.
The RSI has been around for pretty much 50 years, which means it’s quite reliable, but a couple of things to keep in mind: it only turns out to be right some of the time and makes mistakes or goes its own way sometimes, so make sure you use it with other indicators (like 3 SMAs) to up your chances of success.
Let's see how attentive you were - did you pay attention to what you just read, or were you just thoughtlessly scrolling through the article? Time to find out!
Want to use RSI in real life? Check out these lessons from a trader we definitely recommend. After you’re done, where to go to actually use it?
|SRI||Relative Strength Index – refers to leading indicators and has a range of values from 0 to 100, which shows the strength of the trend, where 100 shows the trend is going upwards and 0 shows the downward trend||The relative strength index is most often used to search for overbought and oversold areas, as well as to determine the trend and kickbacks|
|Stochastic||Shows the relationship between the closing price and the maximum-minimum range as a percentage from zero to 100. For example, a stochastic oscillator value of 70+ means that the closing price is near the upper limit of the range||This chart shows overbought and oversold areas, but they are somewhat wider: 20 for oversold and 80 for overbought. It is important to note that in phases of a trend, the Stochastic gives a lot of false signals, unlike the RSI|
|Bollinger lines||Bollinger lines effectively define overbought and oversold zones||Traders who trade trend strategies should take a closer look at the zones where the price goes beyond the indicator. Counter-trend strategies involve the analysis of market segments where the price is close to one of the channel borders|
|ROC||Rate of Change – it is based on only one metric – the closing price, and the ROC shows the percentage increment of the price for a certain period.||ROC helps to effectively distinguish trend movements from kickbacks as the period increases. Thus, despite the simple and understandable formula, ROC retains all the advantages and functionality of oscillators|
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Try out your overbalance theories here, find more indicators you can use, too, and remember to be careful when projecting past results onto the future (no guarantees). But hey, hу who dares, wins, right?