The Concept of Overbought and Oversold
Overview: Momentum is based on price averages, but even as a lagging indicator, the calculated status of price as overbought or oversold informs traders about likely points of reversal. As a mechanism for confirmation of other signals and for trade timing, momentum measures the speed and strength of price movement and identifies points in a short-term trend where price is most likely to retrace.
Anyone who has ridden a bicycle down a hill knows all about momentum. You coast along as you pick up speed. Then, when the downhill turns to uphill, the speed slows down. Eventually the bicycle will stop.
This is one form of momentum.
Traders know this, of course, but too often they forget to apply this ...
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