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Definition of 'Overbought'

Overbought is a term used to describe a security or market that has risen too quickly in price and is therefore considered to be at a high risk of a decline. This can occur when investors become too optimistic about the future prospects of a security or market, and they bid up the price to unsustainable levels.

There are a number of factors that can contribute to a security or market becoming overbought. These include:

* Strong economic growth
* High corporate earnings
* Low interest rates
* Increased investor confidence

When these factors are combined, they can create a perfect storm that leads to a sharp rise in prices. However, this rise is often unsustainable, and the market will eventually correct itself.

There are a number of signs that can indicate that a security or market is overbought. These include:

* A rise in prices that is out of proportion with fundamental factors
* A high volume of trading, especially by retail investors
* A lack of selling interest, even when prices are rising
* A rise in the use of technical indicators, such as moving averages and relative strength indexes

If you see these signs, it is important to be aware of the risk of a decline in prices. This does not mean that the security or market will definitely decline, but it is important to be aware of the possibility.

There are a number of things that you can do to protect yourself from the risk of an overbought market. These include:

* Diversifying your portfolio
* Using stop-loss orders
* Taking profits when prices are high
* Being patient and waiting for a better entry point

By following these tips, you can help to reduce the risk of losing money in an overbought market.

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