Stochastics is used to identify market strength, overbought/oversold.
Indicator Type
Momentum oscillator
Works Best
Flat markets or trading ranges
Formula
The calculation tells us where price is in its recent range.
Parameters
Most traders and markets use a period of 14 although 9 period and 20 period values are used to make the values more or less sensitive, respectively.
Lincoln defaults to a period of 14.
The “Show Zones” box allows the user to draw overbought and oversold lines on the plot. They default to -20 for overbought and -80 for oversold but can be changed by the user.
You can also select color for the plot (and the two zones by selecting the boxes next to each to bring up a color palette.
Theory
%R is the measurement of the placement of a current price within a recent trading range. The theory is that as prices rise, daily (or hourly, minute, etc.) closes tend to occur closer to the high end of their recent range. When prices trend higher or are flat and daily closes begin to sag within the range, it signals internal market weakness.
Interpretation
Williams %R creates the same plot as fast stochastics and only the scale is different. However, because it is not smoothed the plot will tend to show many crossovers and therefore could show false signals to the inexperienced user of this technique.
Values above -20 or below -80 are potential market signals. Divergences between %R and the price trend, both within the overbought and oversold ranges, provide evidence of pending reversals in the market.
