Overbought
Candlefocus EditorOne of the main ways to determine if a security is overbought is by looking at its price-earnings (P/E) ratio. This is a ratio of a security's price compared to its earnings, allowing you to see how expensive it is relative to its profitability. A high P/E ratio can indicate that a security is overvalued and therefore, overbought.
Traders also use technical analysis to determine if a security is overbought. This is the study of price action and volume in order to make predictions. The most popular technical indicator used to detect overbought conditions is the Relative Strength Index (RSI). The RSI looks at the magnitude of recent price changes in order to measure the speed, strength and direction of a trend. The higher the RSI, the more likely a stock is overbought.
In addition to technical and fundamental analysis, investors can also use other methods to determine whether a security is overbought or oversold. These include chart patterns, trendlines and moving averages.
In the end, overbought is a subjective term and investors may disagree as to what constitutes an overbought asset. Some investors may see a security that's ripe for a pullback, while others may believe that the security has further to rise. Ultimately, it's up to the investor to decide whether a security is overbought or not.