When we analyze FOREX market we find that there is no fixed price or area that indicates overbought or oversold.
New trader always have difficulty with that. Because what once was overbought area the second time is oversold area. How to know which area indicates what and in what time?
If I use Exponential Moving Average(EMA), everything starts to get simple.
I will use EMA100(white) which is much slower than the price and is showing current average price.
Price can be above or under the EMA100 (white).
In a long term period you will notice that price is oscillating equally above and under the EMA100(white).
If price goes high above or low under the EMA100(white), it would be in an extreme area.
This is rough setup because EMA100(white) is a slow moving average.
If we want to filter this extreme position additionally, we should add EMA20(yellow).
If you look a little better on your chart you will notice that EMA20(yellow) also oscillates around EMA100(white) in a long term period.
Now it's much easier to define the extreme!
If EMA20(yellow) high above EMA100(white), it indicates overbought area and the other way round.
In a case you wanted to filter the situation a bit more, you can add two, even faster EMA10(blue) and EMA5(red).
EMA analysis is combined with TREND STRATEGY and you can use it if you wish to TRADE GAP!
Target 1 the price is touching EMA5
Target 2 the price is touching EMA10
Target 3 the price is touching EMA20
Target 4 the price is touching EMA50
Target 5 the price is touching EMA100
This type of analysis is necessarily being used on all time frames.