Technical analysis is used to determine when to buy or sell stocks, there are different indicators that can be used for this, but in this post I will talk about the %R indicator.
What is the %R indicator?
One of the first indicators that I found when searching for technical analysis was the Williams Percent Range or %R indicator. This indicator tracks the momentum of a stocks price and describes if it is oversold or overbought. It can be used to determine when to enter or when to exit a market. That is when to buy stock or sell them.
Oversold means that too many traders have opened a sell position on the stock and expect that the price is going to drop even more. This has decreased the value of the stock and it is a good moment to buy the stock.
Overbought means that traders have bought so many stocks that the price of the stock has risen. When this happens there is a chance that the price will drop and normalise.
How to use the %R
The William %R moves between 0 and -100, when it is above -20 (from -20 to 0) then the stock is overbought, when it is below -80 (from -80 to -100) then the stock is oversold.
On the picture below you can see how the indicator moves from oversold (pink area) to overbought (grey area). But what does this mean for an investor?
When the %R is overbought (grey area) it is a good moment in time to sell the stock and vice versa. When the indicator exits the pink area or is in the pink then you should buy the stock.
But oversold and overbought do not give 100% sure indication of trend reversal. They simply mean that the price has reached a high or a low in comparison to previous data. But when a price reaches a low it can mean that it will revert to a uptrend.
In order to have a better idea when to sell or buy, you should always use more indicators.
Example of Usage
Below you can see what I did in the case of this stock. At “Point 1” I saw a good indicator that the market is going to turn, because the stock was oversold. I bought $500 worth of stock, the stock jumped by 1.4%. At “Point 2” I sold my stocks and make $7 in a matter of 4 minutes. Then at “Point 3” I bought the stock because I though the trend is going to jump high, but it just jumped by %0.4, but this time I invested $507, so I earned an additional $2,028. Then my 30 minute slot for trading a day was gone, so I had to stop trading.
Conclusion
Like many other indicators it tries to predict future outcomes based on previous data, which does not work that good in most cases. Indicating that a stock is oversold or overbought does not mean that the price will reverse. It only means that it has reached the peak or bottom in comparison to previous data. It is important to use other indicators in combination with this one to make a better decision.
Take a look at the post about Swing Trading. You can use this indicator also for Swing Trading.
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