In forex, “overbought” refers to a condition where a currency pair’s price has risen sharply over a period, suggesting that it may be due for a correction or pullback. It occurs when buying pressure pushes the price to levels considered higher than its fair or sustainable value. Traders often view an overbought market as a sign that bullish momentum is slowing, and a potential reversal or consolidation could follow.

Technical indicators like the Relative Strength Index (RSI), Stochastic Oscillator, and Commodity Channel Index (CCI) are commonly used to identify overbought conditions. For example, when the RSI exceeds 70, it typically signals that a currency pair might be overbought. However, this doesn’t necessarily mean the price will fall immediately; it’s only a warning that the market could be overstretched.

Overbought conditions can persist for a long time during strong uptrends, which is why traders combine technical signals with fundamental analysis or price action confirmation before making decisions. Ignoring this context can lead to premature trades.

Understanding overbought levels helps traders manage risk, time their entries, and avoid buying into potentially overheated markets. In short, recognizing an overbought condition allows forex traders to anticipate possible reversals and make more balanced, informed trading choices.