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technical analysis_A_to_Z

technical analysis_A_to_Z

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05/09/2014

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Overview

Williams %R (pronounced "percent R") is a momentum indicator that measures overbought/oversold levels.
Williams %R was developed by Larry Williams.

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Interpretation

The interpretation of Williams' %R is very similar to that of the Stochastic Oscillator (page 244) except that
%R is plotted upside-down and the Stochastic Oscillator has internal smoothing.

To display the Williams %R indicator on an upside-down scale, it is usually plotted using negative values
(e.g., -20%). For the purpose of analysis and discussion, simply ignore the negative symbols.

Readings in the range of 80 to 100% indicate that the security is oversold while readings in the 0 to 20%
range suggest that it is overbought.

As with all overbought/oversold indicators, it is best to wait for the security's price to change direction
before placing your trades. For example, if an overbought/oversold indicator (such as the Stochastic
Oscillator or Williams' %R) is showing an overbought condition, it is wise to wait for the security's price to
turn down before selling the security. (The MACD is a good indicator to monitor change in a security's
price.) It is not unusual for overbought/oversold indicators to remain in an overbought/oversold condition for
a long time period as the security's price continues to climb/fall. Selling simply because the security appears
overbought may take you out of the security long before its price shows signs of deterioration.

An interesting phenomena of the %R indicator is its uncanny ability to anticipate a reversal in the underlying
security's price. The indicator almost always forms a peak and turns down a few days before the security's
price peaks and turns down. Likewise, %R usually creates a trough and turns up a few days before the
security's price turns up.

Example

The following chart shows the OEX index and its 14-day Williams' %R. I drew "buy" arrows each time the
%R formed a trough below 80%. You can see that in almost every case this occurred one or two days before
the prices bottomed.

Calculation

The formula used to calculate Williams' %R is similar to the Stochastic Oscillator:

ZIG ZAG

174

Overview

The Zig Zag indicator filters out changes in an underlying plot (e.g., a security's price or another indicator)
that are less than a specified amount. The Zig Zag indicator only shows significant changes.

Interpretation

The Zig Zag indicator is used primarily to help you see changes by punctuating the most significant
reversals.

It is very important to understand that the last "leg" displayed in a Zig Zag chart can change based on
changes in the underlying plot (e.g., prices). This is the only indicator in this book where a change in the
security's price can change a previous value of the indicator. Since the Zig Zag indicator can adjust its values
based on subsequent changes in the underlying plot, it has perfect hindsight into what prices have done.
Please don't try to create a trading system based on the Zig Zag indicator--its hindsight is much better than
its foresight!

In addition to identifying significant prices reversals, the Zig Zag indicator is also useful when doing Elliot
Wave counts.

For additional information on the Zig Zag indicator, refer to Filtered Waves by Arthur Merrill.

Example

The following chart shows the 8% Zig Zag indicator plotted on top of Mattel's bar chart.

This Zig Zag indicator ignores changes in prices that are less than 8%.

Calculation

The Zig Zag indicator is calculated by placing imaginary points on the chart when prices reverse by at least
the specified amount. Straight lines are then drawn to connect these imaginary points.

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