Tradefair Weekly Update / Editor / 05 December 2008 / Leave a comment

Buzzwords of the week: Tip #15. As prices move up down or sideways they tend to fluctuate, so sometimes they are higher than the average and sometimes lower.

A number of indicators called oscillators assess how far away price is from average. At the more extreme levels the market is said to be overbought (when above the average price) or oversold (when below the average price).

The Tradefair Spreads platform contains a number of well know oscillators, which can be accessed by clicking on the Settings button. One of the simplest to understand and use is called Williams %R.

Williams %R just measures where a price is within the range of the last X periods (X is defined by the user). 10 periods is a popular setting.

The Williams %R oscillator has two lines automatically drawn on it, when the reading is above the upper line price it is overbought (high) and when it is below the lower line it is oversold (low).

How to use Williams %R

The secrets with most oscillators are;

* Never go against a trend.
* Use them to go with the current trend, or in a sideways market.
* When the market is in an up trend they can be used to find entry points when they give an oversold reading.
* In a down trend they can be used to find entry points when they give an overbought reading.
* For sideways markets they can be used to go long (if oversold) or short (if overbought).

Note - They don't work all the time so it is essential (as always) to predefine the point at which you will exit a trade taken using them.

Using Williams %R on a 30 minute chart

Here is a recent example of a ten period Williams %R in action on a 30 minute chart of the FTSE 100.

Early on the 5th November the index moved from an uptrend to a downtrend. The trend line drawn underneath the price lows on the 3rd and 4th November was decisively broken (1), and then price started making a series of lower highs and lower lows during the 5th.

During the 5th November, the Williams %R would only be used to identify short trades. You can see that at 15.00 the reading on the Williams %R chart moved into overbought territory (2), providing the first entry point (4580) to the down trend. The logical point for a stop was just above the most recent high.

An additional entry to the down trend was provided the next day 6th at 12.00 (4470) when once again the Williams %R chart moved into overought territory (3). The stop on both positions should have been moved at this point to just above the most recent high.

The third and final entry (4) into the down trend was at 8.00 on the 7th (4310), when once again the Williams %R chart moved into overbought territory. The stops on all three positions should have been moved at this point to just above the most recent high.

All three positions would have been stopped out fairly soon after, as price not only took out the recent highs but also broke above the trend line drawn above the price highs. Risking £1 per point with an initial stop on each position 50 points away, moving the stops each time a new position was opened, the three entries were at 4580, 4470 and 4310. The exit for all three positions was at 4360 (5), a total profit of £280.

Until next week, happy trading

The Tradefair Spreads Team