What is William %R?
William %R, or Williams Percent Range, is a momentum indicator that measures overbought and oversold levels in the market. It compares the current price of a security to its price range over a specific period, usually 14 days. The indicator fluctuates between 0 and -100 with readings below -80 generally indicating oversold conditions, and readings above -20 indicating overbought conditions.
How does William %R work in a trading scenario?
In a trading scenario, traders use William %R to identify potential buy or sell signals. When the indicator falls below -80, it could suggest that the security is oversold and might be due for a price rebound. Conversely, when the indicator rises above -20, it could indicate that the security is overbought and might be due for a price decline. Traders also watch for divergences between William %R and the price of the security which might indicate a potential trend reversal.
Limitation of William %R
The main limitation of William %R is that it can produce false signals in a trending market. For instance, during a strong uptrend, the indicator might remain in overbought territory for an extended period, misleading traders into thinking a price decline is imminent when it's not.