|
Williams %R
Developed by Larry Williams, Williams %R is a momentum indicator that is
the inverse of the Stochastic Oscillator. Also referred to as %R, Williams
%R reflects the level of the close relative to the highest high for the look-back
period. In contrast, the Stochastic Oscillator reflects the level of the close
relative to the lowest low. %R corrects for the inversion by multiplying the
raw value by -100. As a result, the Stochastic Oscillator and Williams
%R produce the exact same lines, only the scaling is different. Williams %R
oscillates from 0 to -100. Readings from 0 to -20 are considered overbought.
Readings from -80 to -100 are considered oversold. Unsurprisingly, signals derived
from the Stochastic Oscillator are also applicable to Williams %R.
As with the Stochastic Oscillator, Williams %R reflects the level of the
close relative to the high-low range over a given period of time. Assume that
the highest high equals 110, the lowest low equals 100 and the close equals
108. The high-low range is 10 (110 - 100), which is the denominator in the %R
formula. The highest high less the close equals 2 (110 - 108), which is the
numerator. 2 divided by 10 equals .20. Multiply this number by -100 to get -20
for %R. Williams %R would equal -30 if the close was 103 (.30 x -100).
The centerline, -50, is an important level to watch. Williams %R moves between
0 and -100, which makes -50 the midpoint.
Low readings (below -80) indicate that price is near its low for the given
time period. High readings (above -20) indicate that price is near its high
for the given time period. The IBM example above shows three 14-day ranges (yellow
areas) with the closing price at the end of the period (red dotted) line. Williams
%R equals -9 when the close was at the top of the range. The Williams %R equals
-87 when the close was near the bottom of the range. The close equals -43 when
the close was in the middle of the range.
Overbought Oversold
As a bound oscillator, Williams %R makes it easy to identify overbought and
oversold levels. The oscillator ranges from 0 to -100. No matter how fast a
security advances or declines, Williams %R will always fluctuate within this
range. Traditional settings use -20 as the overbought threshold and -80 as the
oversold threshold. These levels can be adjusted to suit analytical needs and
security characteristics. Readings above -20 for the 14-day Williams %R would
indicate that the underlying security was trading near the top of its 14-day
high-low range. Readings below -80 occur when a security is trading at the low
end of its high-low range.
A
daily chart from PowerScan shows a typical Williams %R line. Notice the oversold
and overbought conditions are generally found with the peaks and valleys of
this indicator.
|
