Overbought indicates that an asset has been bought so intensely that it is likely overvalued and could reverse lower, while oversold indicates that it has been sold too quickly, is undervalued, and could be about to rebound higher.
These are key dynamics and information that a trader must consider and monitor on the chart.

But how?
This is where the indicator that everyone knows and uses, or rather abuses, comes to the rescue: RSI.

In technical analysis, when the Relative Strength Index (RSI) is above 70, it signals an overbought condition, suggesting that the price of a security has risen sharply and may be poised for a pullback or at least a stop.

Conversely, when the RSI is below 30, it indicates an oversold condition, suggesting that the price has dropped significantly and may be poised for a rebound. Traders use these levels as warnings to identify potential trend reversals and often confirm them with other indicators before making a trading decision.