Overshooting in forex trading is when a sudden change in the exchange rate results in an excessive price movement.
Overshooting” refers to a situation in which the exchange rate unexpectedly moves far beyond the level at which market participants expected the rate to rise (fall) to this level.
In most cases, when overshooting occurs, an “adjustment price movement” in the opposite direction occurs, and the rate tends to settle down to the equilibrium point between buyers and sellers (equilibrium point of supply-demand balance) after a period of turbulent fluctuations.
In this article, we will explain overshooting in FX in detail with specific examples and introduce ideas for trading techniques that take advantage of overshooting price movements.
Chart example of overshooting in forex
An example of overshooting in the FX market is when a price breaks out of a high or low that attracts the attention of many market participants and breaks through several chart points at once without any push or pullback by the forces resisting the price movement.
In other cases, when the market overreacts to sudden news such as statements by key figures, incidents, or disasters, overshoots can occur by breaking out of a number of chart points at once, where a proper rebound or resistance is expected to appear.
Let’s take a look at the actual chart of such overshoots.
Overshoots through chart points at once after breakout
The 5-minute Eurodollar chart below is a case of a breakout down and overshooting the range.
First, it broke out in a downward direction as if swinging upward (becoming a full reversal), stalled for a while and formed a small range, but then broke below the lower limit of the range and fell all the way down to overshoot.
After the overshoot, a short-lived adjustment began, and the price strongly returned to the reversal direction, accompanied by wild fluctuations.
The chart below shows the same scene on an hourly basis.
As you can see, the price has broken below the chart points such as the high-low and neckline that formed the previous double top and double bottom at once.
In such sharp and abrupt overshoots caused by breakouts, there is a tendency for the market participants to form a new direction as price movements begin to adjust with wild fluctuations.
In the case of the current price breakout, the downward trend that had been on a downtrend on the hourly chart or higher was about to turn sharply upward (and was in an uptrend on the short-term level), and the combination of early profit-taking by buyers and counterattacks by selling forces may have triggered a downward overshoot.
Then, after a period of turbulence, the price gradually turned upward and a new direction (trend reversal) was formed.
Overshoot triggered by remarks of key figures
The 15-minute Eurodollar chart below is an example of an overshoot triggered by comments made by Federal Reserve Chairman Jerome Powell.
The market reacted to Chairman Powell’s comments in a hyper-sensitive manner, creating an “excessive price move,” or “overshoot,” which quickly exceeded the upper limit of the previous range and the previous high on the hourly level.
Immediately after that, however, a sharp decline (price adjustment) occurred, possibly due to the entry of countertraders and contrarian forces to confirm profits, and the market quickly returned to its original range (this series of price movements may have been influenced by the Chairman’s iridescent remarks).
This is one of the extreme reversal price movements that are often seen in overshoots involving range breaks.
As a result, as shown in the hourly Eurodollar chart below, a new uptrend was formed after the long upper whiskers on the upper side of the range and the lower whiskers on the lower side of the range.
Overshoots caused by statements by key figures are often followed by a reversal or three, depending on the content of the statement, so it is difficult to give a general description of the characteristics.
However, if a decisive statement that is a fundamental factor is included, a new trend may form directly from the overshoot, and easy contrarian trading is prohibited.
On trading in overshoots (method ideas)
Overshooting is characterized by “sudden strong price movements,” and in many cases, once overshooting occurs, there tends to be an “adjustment price movement” in the opposite direction.
In many cases, the price movement itself becomes a “wild fluctuation” and the rate then settles to the equilibrium point between buyers and sellers (the equilibrium point of the supply-demand balance).
Depending on the factors behind the overshoot (decisive fundamental changes), the overshoot may be the starting point for a new trend.
Trading on these overshoots is risky, and entering the market with the intention of easily riding the momentum is a reckless act, and is basically not recommended.
However, it is also true that market conditions in which volatility increases due to overshooting are an opportunity to generate profits.
Therefore, it is important to confirm the superiority of the “price movement to be targeted” through prior verification of past charts.
Ideas for trading techniques in overshooting
There are various possible patterns for trading during an overshoot phase, but the following are the two main methods that can limit risk.
- A forward trade that takes advantage of the price movement in the stagnation (range) after the overshoot.
- A forward trade that takes advantage of the “wave change” in the turbulence immediately after the overshoot.
In both cases, the basic form of the trade is to take a position after confirming that the rate has begun to move in the overshooting direction again during the price movement after the overshoot.
There are also other patterns, such as when the overshoot is a false move or when you reverse the position in the turbulence immediately after the overshoot, but these are more difficult to execute.
As you gain experience in past chart verification and trading, these high difficulty trades will become an option, but they must be carefully incorporated into your methodology.
1. ideas for trading techniques that take advantage of stagnant (range) price movements after overshoots
Overshoots in FX often appear as sudden and abrupt price movements.
Therefore, reactions (adjustments and wild price movements) after overshoots tend to be formed in a relatively short period of time.
When trading in such price movements, the time axis used on the chart will inevitably be small.
Therefore, in this example, we will use a “one-minute chart” to proceed with the explanation.
Although the “one-minute chart” tends to be generally dismissed as “noisy,” depending on the situation and how you look at it, you may be able to identify advantageous price movements.
The chart below is a 1-minute chart of the Eurodollar, which shows how an overshoot occurred due to the release of an indicator.
After the overshoot occurred, the price rose to higher highs several times but fell sharply once.
The decline gradually narrowed and a head-and-shoulders (bottom) was formed.
This was seen as a sign that the price had bottomed out, and the advantageous point was to buy entry at “A,” when the price broke above the neckline.
After that, a small ascending triangle was formed while making further lows, and the next reasonable buy entry point is at “B,” when the “high of the triangle” and the “past return high” at the 1-minute level are exceeded.
In this way, taking a position in the overshoot direction against the backdrop of buying pressure when a “chart pattern indicating a bottoming out” is established is one advantageous trade.
The 1-minute chart is often referred to as “noise,” but as you can see, there are clear highs and lows, and meaningful chart patterns can also be recognized.
If you are interested, we recommend that you examine a specific 1-minute chart.
2. ideas for trading techniques to capture “wave changes” in turbulent conditions immediately after an overshoot
One of the characteristic price movements of overshooting is the occurrence of turbulence.
In the following 5-minute Eurodollar chart, we can see such turbulence.
In such wild swings, “regular ups and downs” tend to occur with a certain degree of probability, and the above chart shows a typical case.
As can be seen from the circled highs and lows, both are gradually moving closer to the center of the turbulent highs and lows, forming a triangle in a short period of time.
What is interesting to note here is the regularity of the ups and downs of the price.
The price moves in this series of overshoots, reversals from highs, and then rises again, are all characterized by a series of bullish candlesticks (bearish candlesticks) that form highs and lows in regular fashion.
Then, while the opposite legs are gradually mixed in, a triangle is formed with a certain number of candles making highs and lows.
Thus, up to this point, the price has been moving up and down regularly while narrowing the range between highs and lows.
However, with the breakout of the high at “A,” the regularity is broken.
This indicates that the balance (equilibrium) between buying and selling forces has been broken, and at this moment, the buying forces have gained an advantage, which means that the market conditions are such that holding a buy position is advantageous.
Another decisive point indicating that the balance between buying and selling forces has broken down is “B,” but depending on the position of other highs formed by the overshoot, the advantage may be less than that of “A” due to a delay in the market.
In this way, although at first glance it may appear that the market is randomly fluctuating up and down, by paying attention to the regularity of the fluctuations, we can notice the advantage of a breakdown in that regularity.
This is an advanced skill that is difficult to use in actual trading because it requires calm observation of the ever-changing turbulence, but it is worth acquiring through verification and trading practice.
Utilize multi-timeframe analysis
We have explained that a forward trade is appropriate in overshoot price movements, but what you need to pay attention to is the direction of the trend and the position of the chart points in the upper hourly legs.
No matter how much you try to ride the price movement from the post-overshoot range or chart pattern, you may be caught in a strong rebound if the price zone is associated with a chart point of the upper time frame.
By capturing overshoots based on multi-time frame analysis, you can be more flexible in entering the market after turbulent fluctuations, and you can also trade in cases where the overshoot itself is a false move.
Please refer to the article below for a detailed explanation of multi-time frame analysis.
Explanation What is Multi Timeframe Analysis? Methods and Tips, Forex Methodology
Overshooting in FX – Summary
Overshooting in forex trading is an excessive price movement as a result of a sudden change in the exchange rate.
Overshooting can be triggered by a range break or news, and can be the result of panic psychology or large volume movements to take advantage of it.
Since one-sided and excessive price movements tend to reverse or move into turbulence with a significant probability, if you can take risk, it is worthwhile to examine historical charts to take advantage of overshoot price movements.
This is my explanation of the meaning of “overshoot” and ideas for trading techniques.
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