A situation in which the price of a currency pair falls sharply below the level that reflects its true value. This condition is usually the result of an excessive market reaction or panic sales.
In technical analysis, this is a situation when the price of a currency pair has fallen to such an extent – usually on large volumes – that the oscillator has reached the lower limit. This is usually interpreted as a sign that the price of a currency pair is becoming undervalued and may provide an opportunity for investors to make a purchase.
Currency pairs that have experienced a sharp decline in price within a short period of time are often considered oversold. Determining the degree of oversold currency pair is very subjective, it can easily differ between investors.
Determining the zones where the price of the subject currency pair has been unreasonably shifted to a very low level is the main goal of many technical indicators, such as the relative strength index, the stochastic oscillator, the convergence and divergence of moving averages and the cash flow index.
The opposite term is overbought zone