Oversold describes a cryptocurrency with a price lower than its true value, usually occurring when individuals sell the cryptocurrency and the price does not experience a recovery; instead, it continues to decline for an extended period. At that point, there is no buying pressure, making a price reversal unlikely.
Traders typically employ technical analysis tools to understand whether a cryptocurrency is oversold or overbought. Some common technical indicators that traders use are the Relative Strength Index (RSI) and Bollinger Bands. While nobody knows precisely if or when an oversold cryptocurrency will reverse, traders use indicators like these to help make an educated decision on the cryptocurrency.
For example, a stablecoin with sufficient collateral to cover all of its issued tokens is trading lower than its pegged value: If it is redeemable, arbitrage should quickly return it to its true value; if it is not, the recovery process could take much longer, if not indefinitely.
