Williams %R

The Williams %R is an indicator developed by Larry Williams and is similar to the Stochastic Oscillator in calculation but where the Stochastic compares the close to the lowest low over a specified period, the Williams %R compares the close to the highest high over a specified period.

The Williams %R is sometimes called Williams Overbought/Oversold Index.

When prices are trending, Oscillators like the Williams and Stochastics should be viewed with a careful eye when looking at overbought and oversold signals. Generally, when the oscillator is in overbought territory, a crossover into the middle range for the indicator is a signal that prices may fall near term.

When the oscillator is in oversold territory, a crossover into the middle range from below is often viewed as a buy signal leading the expectation of higher prices near term. However this type of interpretation works poorly when price is in a trending environment. In the graph above during the period of October to November, 7 sell signals were given through normal interpretation of the oscillator, where only 2 would have been successful indications of near term price action.

Oscillators also lend themselves to interpretation when divergences between the indicator and price occur.

A divergence of the peaks of price and the peaks of the indicator warns of potential reversal of price trend. A divergence between the troughs of price and the troughs of the indicator also warns of a potential reversal of price trend. On the graph the numbers 1,2,3 and 4 are placed above the period when a divergence in the peaks occurred. The number 5 and the lower part of number 3 show a divergence of the troughs. The price trend from October to mid December is down. You can see that although some of the divergence signals occur prior to a change in direction of the price trend, not all are tradable and some lead to whipsaws. It is important to build a wide body of evidence in support of any trade decision.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets