In Forex trading, the terms overbought and oversold refer to market conditions that indicate potential reversal points based on the analysis of price movements and trading volume.

Overbought describes a situation where a currency pair has experienced a sustained upward move, leading to a price level that appears unsustainable. Traders believe that the currency has been bought too extensively, driving its price higher than its intrinsic value. Technical indicators such as the Relative Strength Index (RSI) or Stochastic Oscillator are often used to identify overbought conditions. For instance, an RSI value above 70 typically signals that the currency pair might be overbought, suggesting that a price correction or a pullback could be imminent.

Conversely, oversold conditions occur when a currency pair has seen significant selling pressure, pushing its price to a level that may be considered too low. This indicates that the currency might be undervalued and due for a rebound. An RSI reading below 30 is commonly used to identify oversold conditions. Traders may look for these signals to anticipate a potential price increase.

Understanding these concepts helps traders make more informed decisions about entering or exiting trades. By identifying overbought or oversold conditions, traders can potentially capitalize on market corrections, enhancing their trading strategies. However, it's crucial to use these indicators in conjunction with other technical analysis tools and market insights to avoid false signals and ensure more reliable trading decisions.