Purpose:
Williams %R is a momentum indicator that measures overbought and oversold levels in a market. It is primarily used to identify potential entry and exit points by signaling when a security may be due for a reversal, based on its recent price movements relative to its high-low range.
Key Components:
- Overbought/Oversold Levels:
Williams %R ranges from 0 to -100, with values above -20 indicating overbought conditions and values below -80 indicating oversold conditions. These levels are used to identify potential reversal points where a security may be overextended in one direction. - Buy and Sell Signals:
Traders often use Williams %R to generate buy signals when the indicator rises above -80 (moving out of the oversold zone) and sell signals when it falls below -20 (moving out of the overbought zone). These signals suggest that the market may be poised for a reversal. - Divergence Analysis:
Divergences between Williams %R and the price of the underlying security can also be used to predict potential reversals. For example, if the price makes a new high but Williams %R does not, it may indicate a weakening trend and a possible upcoming reversal.
Summary:
Williams %R is a momentum indicator that measures overbought and oversold levels to identify potential reversal points. It provides traders with buy and sell signals based on extreme price conditions, helping them time their market entries and exits more effectively.
