When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. You can see the overbought and oversold alerts on EUR to USD chart. The Williams %R takes value above -20, indicating an overbought market at the points marked with red. On the other hand, an oversold market is displayed with the yellow areas when the Williams %R reads values below -80. It is worth noting that when the indicator is above -20 or below -80, it doesn’t necessarily mean that the price will always reverse after reaching this value.
The green dotted lines mark a move above -50 that occurs after an oversold reading. As noted above, overbought is not necessarily bearish and oversold is not necessarily bullish. Top and bottom pickers can act when overbought or oversold, but it is often prudent to wait for a confirmation move. Williams %R reflects the level of the close relative to the highest high for the look-back period. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is different. Williams %R corrects for the inversion by multiplying the raw value by -100.
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In EUR/USD’s daily chart below, you can see that the pair tried to extend its uptrend but failed to reach a new price and %R highs. But while RSI uses its mid-point figure (50) to determine trend strength, traders use %R’s extreme levels (-20 and -80) for cues. As a momentum indicator, it also gives RSI-like vibes in that it measures the strength of a current trend.
Martin Pring’s Technical Analysis Explained illustrates the basics of momentum indicators by covering divergences, crossovers, and other signals. There are two more chapters covering specific momentum indicators, each containing plenty of examples. Currency.com is a global cryptocurrency exchange platform that allows you to trade crypto and other assets. Currency.com is a global cryptocurrency exchange platform that currently does not operate in Europe, UK and Australia, still you are welcome to browse and find out more. Currency.com is a global cryptocurrency exchange platform that currently does not operate in the US, still you are welcome to browse and find out more. Crypto.currency.com is a Gibraltar-based licensed platform that provides crypto exchange services for European, UK and Australian residents.
When the indicator is between -20 and zero the price is overbought, or near the high of its recent price range. When the indicator is between -80 and -100 the price is oversold, or far from the high of its recent range. The indicator is telling a trader where the current price is relative to the highest high over the last 14 periods (or whatever number of lookback periods is chosen).
Limitations of Using the Williams %R
Once a security shows strength by pushing into overbought territory more than once, a subsequent failure to exceed this level shows weakening momentum that can foreshadow a decline. 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.
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- After %R exhibits extreme value, the price starts to move upward, the white arrows, and the trend continues.
- The %R indicator is arithmetically exactly equivalent to the %K stochastic oscillator, mirrored at the 0%-line, when using the same time interval.
- Williams %R corrects for the inversion by multiplying the raw value by -100.
- Technical analysis focuses on market action — specifically, volume and price.
- The indicator can also be too responsive, meaning it gives many false signals.
If the Williams %R decreases while price continues to hit new highs in a bullish trend, a bearish reversal is likely just around the bend. However, because of their different ranges, overbought or oversold signals from these momentum oscillators are reversed. Overbought conditions are signaled by RSI readings over 80 and %R readings between -20 and 0. Oversold conditions are signaled by RSI readings below 20 and %R readings between -80 and -100. Chart 3 shows Arch Coal (ACI) with 14-day Williams %R hitting overbought and oversold levels on a regular basis. The red dotted lines mark a move below -50 that occurs after an overbought reading.