Overbought and oversold indicators such as RSI, Stochastics and CCI, are used by a lot of forex traders and can be useful for identifying turning points and the end of a particular upwards or downwards trend. However they can also be completely useless which is why you need to be careful when using these indicators.

Just take a look at the daily chart of the GBP/USD for example. If you add the RSI (14), Stochastic (8,3,3) and CCI to the graph you will see that the Stochastic went into oversold territory at the start of August and the RSI and CCI joined them a few days leter.

It would have been a reasonable assumption to make that we would see the GBP/USD bounce back upwards after these indicators had spent several days in oversold territory. However this didn't turn out to be the case. Far from it in fact.

These three indicators all indicated an oversold position at the start of August when the price was around 1.9400 and yet are still pretty much in oversold territory now at the start of September with the price sitting at 1.7600. That's 1800 points lower!!

So hopefully you can see the dangers of using oversold and overbought indicators to try and call the bottom or top of a particular trend. Sometimes you may get lucky but there are plenty of other times when the price will delve even deeper into overbought or oversold territory, and you will lose a packet.

You can avoid these kinds of costly mistakes by using other indicators as well for confirmation of a reversal. For example, staying with the GBP/USD, if you had used the TRIX and MACD indicators as well during this period you will see that neither of these two indicators have yet crossed upwards so therefore you would not yet have attempted to call a bottom to this downtrend.

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