Glossary
Overbought
A reading that price has risen far and fast relative to its recent history, flagged by oscillators such as RSI above 70.
Overbought describes a security whose price has climbed so far, so quickly, that an indicator reads it as stretched relative to its own recent behavior. It is a statement about the speed and size of a move, not a verdict that the price is too high. Traders watch for it because stretched moves often pause or pull back, but a strong trend can stay overbought much longer than seems reasonable.
How it is measured
Overbought is almost always defined by a threshold on an Oscillator:
| Indicator | Common overbought level |
|---|---|
| RSI (14) | above 70 |
| Stochastic %K | above 80 |
| Williams %R | above −20 |
| Bollinger Bands | close above upper band |
How traders read it
Overbought signals work best in range-bound markets, where a stock bounces between Support and Resistance. There, a push into overbought territory near the top of the range has often preceded a turn lower.
In a strong Uptrend the same reading means something else: buyers are in control. Momentum traders sometimes treat a first move above 70 as confirmation of strength, not as a reason to sell. Many analysts therefore wait for the indicator to drop back below the threshold, or for a bearish Divergence, before treating overbought as a warning.
Common misconceptions
- Overbought is not overvalued. It says nothing about earnings or fair value; that is the job of Valuation metrics.
- The threshold is not magic. 70 and 30 are conventions from J. Welles Wilder's 1978 book. Some traders use 80/20 for volatile stocks.