Williams' %R

Description

The formula used to calculate Williams' %R is similar to the Stochastic Oscillator:

Williams' %R is plotted on an upside down scale with 0 at the top and 100 at the bottom. To show the indicator in this upside down fashion, MetaStock Pro places a minus symbol before the %R values. You should ignore the minus symbol.

Interpretation

The analysis of Williams' %R is very similar to that of the Stochastic Oscillator except that %R is upside down and the Stochastic Oscillator has internal smoothing.

Readings in the range of 80 to 100% (remember to ignore the minus symbol) 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, it is best to wait for the security's price to change direction before placing your trades. For example, if an overbought/oversold indicator (such as the Stochastic Oscillator or Williams' %R) is showing an overbought condition, it is wise to wait for the security's price to turn down before selling the security (the MACD is a good indicator to monitor change in a security's price). It is not unusual for overbought/oversold indicators to remain in an overbought/oversold condition for a long time period as the security's price continues to climb/fall. Selling simply because the security appears overbought may take you out of the security long before its price shows signs of deterioration.

An interesting phenomena of the %R indicator is its uncanny ability to anticipate a reversal in the underlying security's price. The indicator almost always forms a peak and turns down a few days before the security's price peaks and turns down. Likewise, %R usually creates a trough and turns up a few days before the security's price turns up.