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