A situation in which the demand for a certain currency pair unreasonably pushes its price to levels that are not supported by fundamental data.
In technical analysis, this term describes a situation in which the price of a currency pair has increased to such an extent – usually on large volumes – that the oscillator has reached its upper limit. This is usually interpreted as a sign that the asset price is becoming overvalued, and it can be expected to roll back.
A currency pair that has experienced a sharp price rise within a very short period of time is often considered overbought. Determining the degree of overbought currency pair is very subjective and may differ between investors.
To identify currency pairs that are in the overbought zone, technical traders use indicators such as the relative strength index, the stochastic oscillator and the cash flow index.
An overbought currency pair is the opposite of oversold.