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 profi t 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 138 below.

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.

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.

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

To Summarize

The RSI belong to a class of indicators called trend leading indicators. These are usually used in ranging markets and are not suitable for trending markets. We have discussed the basic concept of momentum, being a measure of speed of price movement. The RSI has oversold and overbought lines or zones at a predefined level. For the RSI, oversold and overbought levels are defined by lines that pass through the significant peaks and troughs of the indicator. There are two basic methods of using these oscillators in ranging markets; using the overbought/oversold regions and divergence between the price and oscillator. When the indicator first moves into the overbought zone and then crosses back through the overbought line this is a signal to go short. Similarly when the indicator moves into the oversold region and then crosses back across the oversold line this is a signal to go long. There are two main types of divergence, a strong and moderate divergence. A strong divergence occurs when the price makes a new higher peak but the momentum indicator makes a corresponding lower peak indicating a loss of momentum in the current up trend. When this occurs it is a signal to go short. Lower price troughs and higher momentum troughs indicate a bullish move and is a signal to go long.