Overbought describes a technical trading condition where an asset has risen too far too fast and may be due for a pullback or correction as buying becomes exhausted. The RSI (Relative Strength Index) above 70 is the most common overbought signal, indicating prices have extended beyond normal levels and profit-taking pressure is building. While overbought assets can continue rising during strong bull runs, these conditions typically represent optimal profit-taking opportunities before inevitable corrections. Overbought doesn't mean "sell immediately" but signals elevated risk and need for caution.
Example:
Bitcoin rallies from $60,000 to $85,000 in two weeks as RSI climbs to 82 (extremely overbought). While momentum remains strong, the overbought signal warns that buying exhaustion is approaching and a 10-20% pullback is likely before the next leg up. Traders recognizing overbought conditions might take 25-50% profits here rather than holding through a correction. Sure enough, Bitcoin pulls back to $72,000 over the next week before resuming its uptrend. Those who took profits in the overbought zone can rebuy lower or simply secure gains.