An asset is called oversold when its price has fallen far and fast compared with its own recent trading range. A momentum indicator usually makes the call: an RSI reading below 30, a stochastic reading below 20, or a price at or under the lower Bollinger Band. An oversold reading describes what price has already done. It does not mean the asset is cheap, and it does not mean a rebound is coming. In a strong downtrend, indicators can stay oversold for a long time.
What oversold measures
J. Welles Wilder, who created the Relative Strength Index, said that when price falls very quickly, at some point it is considered oversold. Every common oversold indicator asks the same question: where is the latest price compared with recent prices? None of them measures value. An asset can be oversold on a chart and still be overpriced on any fundamental measure, and the reverse is also possible.
Overbought is the mirror case: price has risen quickly relative to its recent range.
The three common indicators
Relative Strength Index (RSI)
- Origin: Wilder presented RSI in his 1978 book New Concepts in Technical Trading Systems.
- Formula: RSI = 100 − (100 / (1 + RS)). RS is the average gain divided by the average loss over the lookback period, with losses counted as positive values.
- Default period: 14, the setting Wilder suggested. After the first value, the averages are smoothed: Average Gain = [(previous Average Gain × 13) + current Gain] / 14, and the same for losses.
- Levels: Wilder treated RSI below 30 as oversold and above 70 as overbought. Moving the thresholds to 20 and 80 produces fewer oversold and overbought readings.
Stochastic oscillator
- Origin: George C. Lane developed it in the late 1950s.
- Formula: %K = (Current Close − Lowest Low) / (Highest High − Lowest Low) × 100, measured over the lookback period.
- Default period: 14 periods. A period can be a day, a week, a month or an intraday bar.
- Levels: The usual settings treat readings below 20 as oversold and above 80 as overbought.
Bollinger Bands and %B
- Construction: The middle band is a 20-period simple moving average. The upper band is the middle band plus two standard deviations of price, and the lower band is the middle band minus two standard deviations. John Bollinger calls these settings starting points, not fixed rules.
- Correction to the earlier version of this page: an oversold condition is linked to the lower band, not the upper one. In Bollinger's words, "price is high at the upper band and low at the lower band."
- %B: %B = (Price − Lower Band) / (Upper Band − Lower Band). A value of 0 means price is on the lower band, and a value below 0 means it is under the lower band. StockCharts' ChartSchool says %B "can be considered oversold when it moves to zero or below," and advises identifying the larger trend first.
- Bollinger's own caution: "Tags of the bands are just that, tags not signals." A touch of the lower band is not a buy signal on its own.
Why oversold is not a buy signal
- Readings can persist: StockCharts notes that momentum oscillators "can become overbought (oversold) and remain so in a strong up (down) trend." On the stochastic it adds that "oversold readings aren't necessarily bullish."
- Context matters: Overbought and oversold readings work best when prices move sideways within a range. In a trending market they fire early and often.
- Trend shifts the range: Constance Brown, in Technical Analysis for the Trading Professional, describes RSI moving roughly between 10 and 60 in bear markets and between 40 and 90 in bull markets. In a downtrend, then, RSI may rarely climb back above 60, and a reading near 30 may be routine rather than extreme. The same source says these ranges vary with the RSI settings, the strength of the trend and volatility.
Is your chart reading oversold on the stochastic?
Enter the latest close and the lowest low and highest high of your lookback period to see the stochastic %K reading, then compare it with the usual oversold level of 20.
| Current close | Lowest low over the lookback period (default 14 periods) | Highest high over the lookback period (default 14 periods) | Stochastic %K (below 20 is the usual oversold reading, above 80 overbought) |
|---|---|---|---|
| 95 | 90 | 110 | 25 |
| 92 | 90 | 110 | 10 |
| 107 | 90 | 110 | 85 |
- All three prices are your own inputs from your chart, not figures from any source.
- A result below 20 matches the usual oversold setting and above 80 the usual overbought setting; it describes where price sits in its recent range, not value or what happens next.
This only works out %K from the prices you enter. It does not smooth it into %D, check the trend or timeframe, or tell you whether price will rebound. Oversold readings can last a long time in a strong downtrend.
What analysts watch alongside an oversold reading
These are ways analysts describe momentum, not trading rules.
- Bullish divergence: price makes a lower low while RSI makes a higher low. Wilder read this as momentum not confirming the price move. StockCharts warns that divergences "are misleading in a strong trend."
- Bullish failure swing: RSI drops below 30, bounces, pulls back but stays above 30, then breaks its previous high. Wilder considered failure swings strong signs of a possible reversal.
- Agreement across tools: RSI and the stochastic both measure momentum, so when they agree that is one observation, not two independent confirmations.
Oversold in the fundamental sense
Outside chart analysis, "oversold" sometimes means a price has fallen below what fundamentals seem to justify. For shares, a common yardstick is the price-to-earnings ratio. The US SEC's investor.gov describes it as a way of gauging "whether the stock price is high or low compared to the past or to other companies." It is calculated as the current share price divided by earnings per share over the past 12 months. Most crypto assets have no earnings, so there is no direct equivalent, and crypto oversold calls are almost always technical.
Applying this to crypto charts
The formulas are the same for any asset that has a price series. The result depends on the timeframe you choose: a 14-period RSI on hourly bars and one on daily bars measure different things and can disagree. When you read an oversold claim, check which indicator, which settings and which timeframe it uses.
Limitations: this page explains indicator definitions from their creators and StockCharts' ChartSchool. It does not test how well any of them predict prices, and it is not trading or investment advice.
