Page 33 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

As traders, we do not have this luxury.

Overbought and Oversold Conditions

Markets work to bring price in line with supply and demand.

The Market Itself Is Never Overbought or Oversold—Think about It

Markets are perfectly efficient. If supply always equals demand, then how can a market
be overbought or oversold? It may be expensive, but expensive can be a relative term.

For example, suppose you purchased a painting by a currently unknown artist/painter
for $1,000. The next week your artist/painter gets reviewed in a famous magazine and
his work is now nationally recognized, so your painting increases in value to $1,500.
Some say that your painting is too expensive or that prices are now overbought
because it went up in value too quickly in just one week.

What if the next week a famous collector buys a similar painting by the same
artist/painter for $4,000, and now the value of your painting increases to $3,000!
All the indicators said that it was overbought at $1,500 because the price went up too
high in a short period of time. The reality is that because of supply and demand, prices
are exactly where they should be—regardless of the reasons. There is no such thing in
an efficient market as overbought and oversold. Prices are where they are because that
is where they are supposed to be.

Supply = Demand

This is important…

…when supply equals demand,
both the seller and the buyer disagree on value,
but agree on price.

When this happens, it is a truth in the marketplace. The amount of supply and demand
occurring in the market is called volume. That also is a truth.

Both price and volume are absolute and are truths of the market because they are not
distorted. (Indicators used in technical analysis often distort price and volume.)

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