DEFINITION of 'Overbought'

1. A situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals.

2. In technical analysis, this term describes a situation in which the price of a security has risen to such a degree - usually on high volume - that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback.

BREAKING DOWN 'Overbought'

1. An asset that has experienced sharp upward movements over a very short period of time is often deemed to be overbought. Determining the degree in which an asset is overbought is very subjective and can differ between investors.

2. Technicians use indicators such as the relative strength index, the stochastic oscillator or the money flow index to identify securities that are becoming overbought.

An overbought security is the opposite of one that is oversold.

  1. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  2. Price Persistence

    The tendency of a security's cost to continue moving in its present ...
  3. Technically Strong Market

    A market in which both open interest and prices are increasing ...
  4. Technically Weak Market

    A market in which open interest is increasing and prices are ...
  5. Oversold

    1. A condition in which the price of an underlying asset has ...
  6. Overvalued

    A stock with a current price that is not justified by its earnings ...
Related Articles
  1. Active Trading Fundamentals

    Confirming Price Movements With Volume Oscillators

    Use this indicator to validate a change in price direction and moving averages.
  2. Technical Indicators

    The Basics Of Money Flow

    Learn how this indicator uses both price and volume to record a more complete picture of price action.
  3. Options & Futures

    What Can Traders Learn From Investors?

    Discover tips from a long-term strategy that can help you make better short-term trades.
  4. Forex Education

    Find Forex Profit With The RSI Rollercoaster

    This high-reward setup will provide plenty of ups and downs before a big climb.
  5. Active Trading

    An Introduction To The Relative Strength Index

    Learn the difference between relative strength and the relative strength index, a frequently used technical analysis oscillator.
  6. Forex Education

    Premier Stochastic Oscillator Explained

    This oscillator has been used since the 1950s by traders and investors to anticipate areas where the market may change direction.
  7. Forex Education

    Schaff Trend: A Faster And More Accurate Indicator

    The Schaff Trend Cycle Indicator is forward-looking and generates signals much faster than old indicators like the MACD.
  8. Active Trading Fundamentals

    Finding Short Candidates With Technical Analysis

    Learn how to distinguish tops and bottoms in the equity market when short selling.
  9. Active Trading

    Tales From The Trenches: A Simple Bollinger Band® Strategy

    Spot extreme short-term price drops and profit on the rebound.
  10. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  1. How can I use Bollinger Bands® to trade binary options?

    Bollinger Bands can be used to trade binary options, because they are an effective tool to signal when markets become oversold ... Read Full Answer >>
  2. Why is the Toraku Index important for analysts of the Tokyo Stock Exchange?

    The Toraku Index is a technical indicator for the Tokyo Stock Exchange that compares the number of advancing versus declining ... Read Full Answer >>
  3. What are the best technical indicators that complement the Price Rate Of Change (ROC)?

    Some of the best technical indicators to complement a trading strategy using the price rate of change, or ROC, are moving ... Read Full Answer >>
  4. What is the advantage of using the relative strength index (RSI)?

    A major advantage of using the relative strength index (RSI) is that it ultimately indicates the overbought (70) and oversold ... Read Full Answer >>
  5. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  6. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!