Williams’s %R compares a stock’s
closing price to its high and low prices for the period. The formula
emphasizes the high prices. When plotted, a negative vertical/horizontal
scale is used. The vertical axis is measured from 0 to –100, while the
horizontal scale represents the time periods.
Below is a diagram of the W%R
oscillator, using Raytheon as an example. Raytheon is a relatively
inexpensive way to participate in the defense industry. The demand for
missiles and defense electronics, both core businesses for Raytheon, should
permission of Yahoo! Inc.
ă 2004 by
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.
The W%R oscillator identifies when a
stock is overbought or oversold. A reading of 0 to –20 represents an
overbought range, while a reading of –80 to –100 represents an oversold
stock. The nearer the closing price is to its high for the period, the
closer to 0 on the chart.
It is important to buy in the
direction of the trend. If a stock is in an overbought or oversold range,
one should be cautious and keep to the direction of the trend until a
reversal signal is generated.
When a stock is in an oversold
situation, technical analysts either buy in the direction of the trend
(short the security) and sell when a reversal signal is generated, or they
wait until the trend reverses before taking a long position. Conversely, if
a stock is in an overbought range, they either long the security until a
sell signal is generated, or wait for a sell signal and then short the
Look for stock prices that diverge
from the W%R trendline. Normally, divergences create buying opportunities;
try to find the cause for the divergence before acting. Stock prices
usually revert to their typical trend patterns.
The calculation for the Williams %R is
= [(High Price (N) – closing price) / (High Price (N) – Low Price (N))]
N = Number
The W%R indicator is similar to the
Fast Stochastic’s %K line, except the numerator of the W%R line subtracts
the high price for the period from the closing price, while the numerator of
the %K line subtracts the closing price from the period’s low price. The W%R
is charted and measured in negative values, while the stochastic’s %K
line uses positive values. Additionally, the W%R chart does not use a
smoothing moving average signal trendline, as the stochastic does.
The W%R trendline is a valuable tool to identify the
direction of stock prices.
Click below for more information on
Rate of Change
Relative Strength Index
Money Flow Index