Overbought
Definition
A technical condition where an asset has risen so far, so fast that momentum indicators suggest the move may be extended and due for a pullback or consolidation. Most commonly defined as RSI above 70.
Example
“"RSI hit 85 and the stock was three standard deviations above the 20-day mean — overbought on every metric, so I tightened my stop and cut the position."”
Detailed Explanation
"Overbought" is a technical label, not a sell signal on its own. It means that by the measure of one or more indicators, price has moved up faster than its recent baseline — buyers are exhausted relative to recent history. The most common threshold is an RSI reading above 70, though Stochastics above 80, a price extended far above its Bollinger Band upper band, or a massive gap from the 200-day moving average can all point to an overbought condition.
The critical mistake most beginners make: treating overbought as a guaranteed reversal signal. In a strong uptrend, RSI can stay above 70 for weeks, and price can continue making new highs the entire time. Shorting simply because something is overbought, without a catalyst, a pattern, or confirmation of a reversal, is one of the most reliable ways to lose money in trending markets.
The productive use of the overbought label is as a filter for longs, not a trigger for shorts. When RSI is above 70 and you're considering entering a long position, you're buying into an already-extended move — the risk/reward is typically poor. Better entries come when overbought conditions reset: RSI pulls back toward 50, price consolidates, and the trend then resumes. That's the buy, not when the reading is at extreme highs.
For short sellers, overbought conditions matter most at structural resistance levels. Overbought at a fresh 52-week high with no resistance overhead is very different from overbought at a prior significant top. Context is everything. The indicator gives you a temperature reading; price structure tells you whether to act on it.