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.
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?
Nominex offers the most secure platform we’ve ever known (no joke) with a license from the world’s cybersecurity capital Estonia, a supreme education program, and myriads of other ways of earning money in parallel, with 0 starting capital, and while you sleep. But more than anything we’re happy to provide you with a pretty awesomely simple, intuitive, and sleek UI that will make all your new ideas a reality in nanoseconds.
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?