What It Means
Overbought describes a security that's risen sharply enough, fast enough, that traders read the rally as overdone relative to its fundamentals. Like oversold, it's a read on the speed and size of the move, not a guarantee of a pullback.
How It Works
Traders typically flag overbought conditions using indicators like RSI crossing above 70, or a contrarian reading on Put Call Ratio when call buying gets crowded. The logic is that after a fast, one-sided rally, there's less fresh buying power left to keep pushing price higher.
Warning
Overbought can stay overbought. In a strong uptrend, an indicator can sit in overbought territory for a long stretch while price keeps climbing. It's context for a decision, not a sell signal by itself.
Related Terms
- Oversold — the opposite read, on a sharp price fall
- Contrarian Indicator — the broader interpretive lens overbought readings fall under