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Williams %R

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 only increase.

Reproduced with permission of Yahoo! Inc. ă 2004 by Yahoo! Inc.
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 security. 

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 as follows:

  W%R = [(High Price (N) – closing price) / (High Price (N) – Low Price (N))] * -100

Where:

N = Number of periods

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 oscillators:
Rate of Change
Relative Strength Index
MACD
Price Oscillator
Stochastic
Money Flow Index
Volume + Moving Average
 

 

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