V.9:6 (237-238): Comparing Indicators: Stochastics %K versus Williams' %R by Thom Hartle

Comparing Indicators: Stochastics %K versus Williams' %R by Thom Hartle

Ironically, technicians today suffer from overabundance. Compared with the dearth of only a few years ago, technical analysis packages today offer so many indicators that a trader can be overwhelmed. As a consequence, building a trading system based on an array of technical indicators requires painstaking investigation to assure that each indicator is appropriate for the task in question. A typical trading system, for instance, could have long, intermediate- and short-term indicators intended to produce trading signals with different time horizons. Now, many indicators have demonstrated unique rates of success for individual markets for different time horizons. On one hand, a simple moving average is a good indicator of the direction of a intermediate- to long-term trend, but it is ill-suited to forewarn of a possible reversal. On the other hand, an oscillator will alert a trader of a loss of momentum setting the stage for a reversal, but it will produce ineffective signals regarding the trend, perhaps signaling reversals while the trend continues. The choice of technical studies can confuse more than enlight.

DOUBLE, DOUBLE

One problem arising from a surfeit of indicators is the possibility of two different indicators duplicating signals. An example of this situation is the application of the stochastics indicator (%K) and Williams' %R. Both indicators are overbought/oversold oscillators. In fact, both of these oscillators observe the same thing.

(The stochastics oscillator has two components: %K and %D. Our concern here is directed toward %K, because %D is simply a three-day smoothed version of the %K and not germane to the comparison of the stochastics %K and Williams' %R.)