What Is Overbought?
Overbought is a term used in technical analysis to describe when the price of an asset has risen too quickly and become overvalued. It occurs when investors are overly optimistic about the future prospects of a stock or other security, causing them to buy it at prices that may be higher than its true value. This can lead to a situation where there is more demand for the asset than what can be supported by its fundamentals, leading to an unsustainable rally in prices.
When an asset becomes overbought, it means that buyers have driven up the price beyond what would normally be expected based on fundamental factors such as earnings growth or dividend yield. As a result, traders will often look for signs of weakness in order to take profits before any potential correction takes place. Overbought conditions can also indicate that market sentiment has shifted from bullishness towards bearishness and could signal a reversal in trend if not addressed soon enough.