Williams %R

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Williams %R

The Williams %R is an indicator developed by Larry Williams and is sometimes called Williams Overbought/Oversold Index.

Description

Williams %R is plotted on an inverted scale with 0 at the top and 100 at the bottom.

Williams %R is based on a presumption that prices tend to close in the upper end of the range in the late stages of an uptrend and tend to close in the lower end of their ranges during the final stages of a downtrend. In this respect it is similar to the Stochastic indicator, 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.

Interpretation

Analyzing and interpreting the Williams %R is very similar to that for the Stochastic Indicator except that Williams %R is inverted, and the Stochastic is smooth due to the averaging for the %D line.

Readings in the range of 80 to 100% indicate that the market is oversold, while readings in the 0 to 20% range suggest that the market is overbought.

As with all overbought/oversold indicators there are many false signals and so it is best to wait for the price to change direction before placing your trades. Perhaps combining an oversold signal with a short term Highest High as a trigger could produce the beginnings of a trading system.

Alternatively, if an overbought/oversold indicator (such as the Stochastic Oscillator or Williams %R) is showing an overbought condition, it is prudent to wait for the price to subsequently turn down ( and trade below the Lowest Low indicator for confirmation. It is not unusual for overbought/oversold indicators such as the Williams %R to remain in an overbought/oversold condition for a long while a strong trend is in place. Under these circumstances many false signals will be given.

Observers of the Williams %R indicator say it has an uncanny ability to anticipate a reversal in the underlying security's price. The indicator can peak and turn down a few periods before the security's price peaks and turns down. Likewise, %R can create a trough and turn upward a few periods before the security's price turns up.

However, as with all trading, remember that false signals are possible. For this reason traders should learn and understand the benefits of using stop losses and applying them to limit the adverse impact of losing trades on an account.

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