Williams %R
Definition:
The main concept of Williams' %R is "gravitation towards the mean." If within a given time period, the price is near the high end of a period's range, the security tends to be overbought, and is vulnerable for a sell-off. Conversely, if the price is near the low end of a period's range a potential rally is could occur due to oversold market conditions. Most Charting programs do not plot Williams' %R as negative numbers, but on a scale of 0 to +100, so as to make its conventional signals in line with other common oscillators and indicators. An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100.
Interpretation:
If Williams' %R moves above 80, it can be considered a signal of an overbought market. When Williams' %R moves below 20, it can be considered a signal of an oversold market. While Williams' %R is a very powerful indicator used by many market technicians, the following should be noted when using this indicator. Although %R has some tendencies to be a leading indicator (in other words, to bottom out or peak before the price does), some suggest that one might not consider buying in an oversold market until the price actually begins to turn upwards, or sell in an overbought market until the price actually begins to turn downward. This is due to potentially prolonged overbought/oversold periods. This suggests that %R should be confirmed with other indicators that may be able to distinguish between the two circumstances.
The optimal period for %R is the cycle length of the security, although periods of ten and twenty are also commonly used.
