Oversold means an asset has declined excessively in a short period and may be due for a bounce or reversal as selling becomes exhausted. RSI below 30 is commonly used to identify oversold conditions, suggesting prices have fallen beyond normal levels and buying pressure is building. Smart money often accumulates during oversold conditions while retail panic sells, creating prime buying opportunities. However, assets can remain oversold during extended bear markets, so oversold signals work best when combined with other technical or fundamental analysis.
Example:
During the May 2021 crypto crash, Bitcoin dropped from $58,000 to $30,000 in one week as RSI fell to 18 (severely oversold). While fear dominated headlines, this extreme oversold reading signaled panic selling exhaustion and potential reversal. Traders who bought Bitcoin in this oversold zone between $28,000-$32,000 captured a bounce back to $42,000 within weeks (40% gain). Oversold conditions don't guarantee immediate reversals but identify statistically favorable risk-reward entry points where downside is limited.