INDICATORS . Oscillators (1) Larry Williams

27 Oct

Larry Williams indicator aka (also known as) %R was developed by Larry Williams is a momentum oscillator that is closely related to the Stochastic %K oscillator, it is designed to help indicate overbought and oversold levels. % R reflects the current closing level relative to the highest high during the look-back period. %R oscillates from 0 to -100. Readings from 0 to -20 are considered overbought; readings from -80 to -100 indicate oversold conditions.

Trading with %R.

Being a bound oscillator, Williams % R makes it easy to identify overbought and oversold levels. Readings above -20 indicate overbought conditions, and a currency trading near the top of its “n” period range. Readings below -80 show oversold conditions and a currency trading near the bottom of its recent “n” period range. Traders should note that overbought readings are not necessarily bearish since a currency can become and remain overbought during strong up-trends. Consistently high readings indicate sustained buying pressure, which may persist for long periods. Traders should exercise the same caution with oversold readings.

Trading Signals.

For the reasons outlined above it is more prudent to wait for confirmation of a reversal by acting when the %R moves through -50, selling as the %R falls through -50 after an overbought reading and buying as the %R rises through -50 after an oversold reading. More aggressive traders can act on overbought or oversold readings only but accordingly accept higher risk. Traders should also look for momentum failures that occur when a currency fails to move back into the overbought or oversold territory, which can foreshadow significant price moves.

After trading in the overbought/oversold zone more than once (having been brought about by heavy buying/selling) a failure to reach back into the zone often signals a weakening of momentum. Traders should watch for a reversal and act when the %R moves through -50, especially if the move is confirmed by a trend line break on the price chart.

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