Define overbought stock market
Volume surge mean abnormal trading activity and abnormal trading activity mean that a bigger than usual number of orders were filled which mean that buying or selling pressure could become exhausted and it may lead to shift in supply demand balance with further trend reversal.
As a rule, big volume surge, pushes a security in overbought or oversold condition depending whether this volume surge occurred at the top or at the bottom. If pressed for an answer, few are able to define them clearly. But where exactly is the point at which one could objectively say a stock has risen too far too fast and how exactly would one make the objective rather than subjective determination that a stock has become too expensive?
If the market is considered overbought, technical analysts will sell, and if it is thought to be oversold, they will buy. While this may be useful in some cases, it does not explain why we should be buying a market that is oversold or selling a market that is overbought.
Moreover, what is the true reason the market is likely to reverse once it has become overbought or oversold?
The issue becomes even more perplexing when one considers that there are well over a hundred different technical indicators in use today.
First, it may be stating the obvious but it is often forgotten that in order for there to be a trade, there must always be a seller and a buyer - you simply cannot sell shares to "no one".
Someone - another trader, a market marker or specialist, broker, bank, mutual fund, etc. So, logically one cannot say that when a market is "oversold" that "too many shares" were sold. Let us take a look at example in which we present a highly simplified model of the market.
Oversold
Our particular model involves only two traders who are making buying and selling decisions. Between the two traders, the following transactions take place over the course of several days:. On the first day, let us assume that trader 1 wants to buy and trader 2 wants to sell; however, the buy and sell orders are not evenly matched, because trader 1 desires to purchase twice as many shares as trader 2 is willing to sell. We have situation here where the demand exceeds the available supply: To satisfy the balance of supply and demand, the price of the shares has to move up assuming the buyer is willing to pay more i.
Here is the tally at the end of the first trading day:. Here is the tally at the end of the second trading day:. On the third day, trader 1 wishes to purchase another two shares. Trader 1, however, can only afford to buy two shares, because he has now run out of disposable cash. Here is the tally at the end of the third qantas forex card day:.
Overbought Definition - icamaveyi.web.fc2.com
At this point, we have situation where trader 1 would be willing to purchase further shares, has however run out of disposable cash to fund further acquisitions. Trader 2, on the other hand, would be willing to sell more of his shares, but cannot find a buyer at least not at the how do i buy walmart stocks he envisions selling at.
At this juncture, we could say that trader 1 "has overbought". He kept buying shares as they moved up in value and this has depleted his cash. Trader 1, should he wish to participate in further trading activity, will have no choice but to sell a few shares in order to fund possible future purchases. Trader define overbought stock market will now become a seller - there will now be two sellers where before there was only one. Because both traders are now in sell mode, this will drive the price down, at least to the point where trader 2 is ready to become a buyer he has cash.
Below you see a graphical representation of what happened in our market model:. Volume spike marks Overbought condition. Define overbought stock market above is, of course, a very simplistic model of how a market operates. The market is infinitively more complex: Regardless of the market's great complexity, the following principles outlined in our market model hold true:.
In summary, after a long run in one direction, the appearance of a big volume surge means that a large number of shares are being transferred from one group of futures brokers new york participants to another; it is at this point that the market can become "overbought" or "oversold".
By analyzing this volume surge how big is it, how far away is it from a previous back call cisco options web page point, how prolonged in time is ityou can anticipate when the market is likely to reverse in the short- mid- or long-term. The advances and declines volume can assist you in making that determination because it shows exactly where the major trading activity is concentrated in what group: On the other hand, we think most investors do not necessarily want a detailed analysis anyway.
Just imagine if the newscaster provided the following version of a market that is "overbought" and has started to reverse: Nobody would listen to this, the majority wants simple statements such as, "Investors are currently selling out in droves" or "investors are taking profits ".
These "explanations" do not require a lot of thinking or analysis. The newscaster delivers the news in a way acceptable to the majority - and there is nothing wrong with that. Our more elaborate explanation is simply designed for those who wish to learn more, and come to a better understanding of why and when things are happening in the markets. By Victor Kalitowski for MarketVolume.
Overbought Oversold Levels and Volume Surges Volume surge mean abnormal trading activity and abnormal trading activity mean that a bigger than usual number of orders were filled which mean that buying or selling pressure could become exhausted and it may lead to shift in supply demand balance with further trend reversal.
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Current Report Detailed Report Weekly Report Arch. HL Range Graph HL Range Chart About HL Range Graphs About HL Range Charts. Volume Surges Mid-Term Support Mid-Term Uptrend Examples Examples Examples Examples Examples Examples Examples Examples Examples Examples Understanding of volume surges in technical analysis and how they could lead a stock market into overbought or oversold condition explained on a simplified market example.
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