Technical Indicators : Introduction & Interpretation of William %R Oscillator

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William %R - Introduction & Interpretation

The William %R indicator was developed by Larry Williams. This is almost similar to stochastic oscillator except for a negative scale. The William %R indicator always moves between zero and minus hundred (-100)

Interpretation of William %R Indicator

Most popularly stochastic indicator is used in two ways

a. To define overbought and oversold zone

Generally William % R reading between 0 and -20 are considered overbought and William % R reading between -80 to -100 are considered oversold. It basically suggests that

  • One should book profit in buy side positions and should avoid new buy side positions in an overbought zone.
  • One should book profit in sell side positions and should avoid new sell side positions in an oversold zone

This would be clearer from figure below.

t1.png
Figure illustrates overbought and oversold zones for spot Nifty. It is clearly visible that in most of the cases prices have corrected from overbought zone and similarly prices have rallied from oversold zone.

b. Look for Divergences- Divergences are of two types i.e. positive and negative.

Positive Divergence-are formed when price makes new low, but William % R fails to make new low. This divergence suggests a reversal of trend from down to up. This would be clearer from figure below.

t2.png
Figure illustrates Nifty spot making new lows whereas William % R fails to make new low, finally Nifty trend reversed from down to up.

Negative Divergence-are formed when price makes new high, but William % R fails to make new high. This divergence suggests a reversal of trend from up to down. This would be clearer from figure below.

t3.png
Figure illustrates Nifty spot making new highs whereas William % R fails to make new high, finally Nifty trend reversed from up to down.

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Tuesday, 17 October 2017

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