Detecting Statistical Overbought & Oversold Levels on Technical Indicators

Eliminating Subjectivity in Mean-Reversion Trading with Technical Indicators

Sofien Kaabar, CFA
7 min readAug 17, 2022


We are constantly told about oversold and overbought levels as fixed numbers, but as markets move, so do their structure and statistical properties. We need to find a more objective and dynamic way to detect oversold and overbought levels on technical indicators. This is precisely the goal of the article.

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The Concept of Moving Averages

Moving averages help us confirm and ride the trend. They are the most known technical indicator and this is because of their simplicity and their proven track record of adding value to the analyses. We can use them to find support and resistance levels, stops and targets, and to understand the underlying trend. This versatility makes them an indispensable tool in our trading arsenal.

EURUSD hourly values with the 200-period simple moving average.

As the name suggests, this is your plain simple mean that is used everywhere in statistics and basically any other part in our lives. It is simply the total values of the observations divided by the number of observations. Mathematically speaking, it can be written down as:



Sofien Kaabar, CFA

Top writer in Finance, Investing, Business | Trader & Author

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